/perspectives/weekly-viewpoint/greed-trumps-gravity

Greed Trumps Gravity

The major market indices finished higher for a second consecutive week as expectations that the Trump administration will cut taxes and increase spending renewed bullish sentiment.

November 21, 2016    |    By Mike Schwager

Performance for Week Ending 11/18/16:

The Dow Jones Industrial Average (Dow) added 0.11%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 1.21%, the Standard & Poor’s 500 Index (S&P 500) finished up 0.81% and the Nasdaq Composite Index (NASDAQ) tacked on 1.61%. Sector performance was positive with 9 of the 11 S&P sector groups finishing higher. The Telecom sector (+3.02%) was the best performer while Healthcare (-1.23%) was the worst.

Index* Closing Price 11/18/2016 Percentage Change for Week Ending 11/18/2016 Year-to-Date Percentage Change Through 11/18/2016
Dow 18867.93 +0.11% +8.28%
Wilshire 5000 22805.93 +1.21% +7.74%
S&P 500 2181.90 +0.81% +6.75%
NASDAQ 5321.51 +1.61% +6.27%

*See below for Index Definitions

 
MARKET OBSERVATIONS: 11/14/16 – 11/18/16

The major market indices finished higher for a second consecutive week as expectations that the Trump administration will cut taxes and increase spending renewed bullish sentiment. According to the American Association of Individual Investors (AAII) investors are becoming more upbeat with its weekly poll showing bullish sentiment climbing to 46.7%, the highest level since February 2015 and nearly double the rate prior to the election.

The consensus viewpoint heading into the election was that a Trump victory would result in a large drawdown in the equity markets. However, the market has an uncanny knack for doing exactly the opposite of what everyone expects and instead of selling off, many of the major indices rallied and are now at or near all-time highs.

As mentioned in these missives over the years, “the reaction to the news is always more important than the actual news.” The positive reaction suggests that investors are willing to give Trump’s pro-business policies the benefit of the doubt. The proposed combination of infrastructure spending, defense spending, individual and corporate tax cuts, and deregulation all are very growth friendly. These type of growth policies are typically applied to an economy that is in free-fall, however, that is certainly not the case today and therefore a timely implementation of these policies could results in a further acceleration of growth.

As a long-term investor I truly believe that fundamentals are the key driver of equity prices. Its things like economic growth, earnings growth, and monetary policy that ultimately matter and from that point of view the outlook remains supportive of additional upside.

  • The consensus viewpoint heading into the election was that a Trump victory would result in a large drawdown in the equity markets. However, the market has an uncanny knack for doing exactly the opposite of what everyone expects and instead of selling off, many of the major indices rallied and are now at or near all-time highs.
     
  • As mentioned in these missives over the years, “the reaction to the news is always more important than the actual news.” The positive reaction suggests that investors are willing to give Trump’s pro-business policies the benefit of the doubt. The proposed combination of infrastructure spending, defense spending, individual and corporate tax cuts, and deregulation all are very growth friendly. These type of growth policies are typically applied to an economy that is in free-fall, however, that is certainly not the case today and therefore a timely implementation of these policies could results in a further acceleration of growth.
     
  • As a long-term investor I truly believe that fundamentals are the key driver of equity prices. Its things like economic growth, earnings growth, and monetary policy that ultimately matter and from that point of view the outlook remains supportive of additional upside.
     

Bottom-Line: In the near-term, equity markets could see some consolidation as the political “honeymoon” begins to fade. However, based on the improving economy, a resilient consumer, the ongoing stabilization in oil prices and low interest rate environment – the domestic equity markets should continue to have an upward bias for the foreseeable future.

Yellen Testimony: In testimony before the Joint Economic Committee, Fed Chair Yellen strongly hinted that rates will be lifted at the December FOMC meeting. According to the text of her testimony, a rate hike “could well become appropriate relatively soon if incoming data provide some further evidence of continued progress toward the committee’s objectives.” Yellen also reiterated the expectation of Fed officials is that future rate increases will be “gradual.” The Fed chair warned of the risks attached to waiting too long before raising rates and stated that she is committed in serving until the end of her current term. According to Bloomberg, fed funds future are currently discounting a 98% probability of a hike at the December gathering.

Economic Momentum: Last week’s batch of economic data underscored building momentum in the economy. The Labor Department reported that initial jobless claims fell the lowest level in four decades, underscoring tightening labor market conditions. Elsewhere, the Commerce Department reported that housing starts during the month of October surged by 25.5% to an annualized rate of 1323K units, the highest pace in nine years. The New York Fed reported that manufacturing activity in the greater NY area expanded for the first time in 4 months. Lastly, the Commerce Department reported that retail sales during the month of October rose 0.8%, solidly above the 0.6% gain forecasted by economists. Excluding Autos, sales rose 0.8%, also above expectations.

The Week Ahead: U.S. financial markets will be closed on Thursday in observance of the Thanksgiving holiday and will close at 1:00pm ET on Friday. Third-quarter earnings season continues to wind down with just a dozen members of the S&P 500 scheduled to release results. On the data front, the focal points will be October existing home sales, October durable goods orders, the November PMI Manufacturing Index, October new home sales, the University of Michigan’s November consumer sentiment survey and the minutes from the November Federal Open Market Committee.

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

Indices do not include any expenses, fees, or sales charges, which would lower performance. Indices are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.

The individual companies mentioned in this piece were for informational purposes only and should not be viewed as recommendations.

The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader themes. This document contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Information in this report does not pertain to any investment product and is not a solicitation for any product. This material has been prepared using sources of information generally believed to be reliable. No representation can be made as to its accuracy.




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