A Donald Trump victory in the 2016 U.S. presidential election was supposed to cause a mass selloff in stocks, even a market panic. Instead, the Dow Jones Industrial Average had its best week since 2011.
Talk about getting it wrong. While all the pre-election focus was on the downside of a Trump victory—the protectionism, the score-settling, and the divisiveness—the president-elect, in his victory speech, dialed back the belligerence and struck a conciliatory tone. At the same time Republicans walked away with control of Congress, likely putting an end to Washington gridlock and creating a clearer path for Trump’s massive stimulus plans—more than $4 trillion in spending and tax cuts. Despite an initial selloff in the futures market, “the market saw an opportunity and it jumped,” says Strategas Research Partners’ Daniel Clifton.
Did it ever. The Dow Jones Industrial Average climbed 959.38 points, or 5.4%, to 18,847.66, a new all-time high. The Standard & Poor’s 500 index gained to 2164.45, to snap a two-week losing streak, while the Nasdaq Composite rose 3.8% to 5237.11.
The gains, however, weren’t spread evenly across the market. Health care, which had been the worst-performing sector in the S&P 500, surged 3.3% as the market bet that Trump would focus less on drug pricing and other forms of regulation than Hillary Clinton would have. Technology stocks, which entered the election as the market’s third-best-performing sector, tanked, with Facebook (FB), Amazon.com (AMZN), Netflix (NFLX), and Alphabet (GOOGL) dropping 4% or more in the three days after Trump’s victory. William Smead, chief investment officer at Smead Capital Management, attributes the decline to the fact that big tech went to bed on Nov. 8 with infinite growth opportunities, and woke up with the possibility of being designated monopolies. “Their world literally got flipped upside down,” he says. He doesn’t expect that to change soon.
Perhaps the bigger surprise following Trump’s win was that basic price trends remained unchanged for some parts of the stock market. The S&P 500 industrial sector, for instance, already had gained 3.1% from the beginning of July until Nov. 8, and then tacked on nearly 5% after the vote. Financials, too, continued their hot streak by jumping more than 8%, to go with their 7.6% gain prior to the election. Losers stayed losers, as utilities and consumer staples, which had dropped 6.5% and 4.3%, respectively, before Trump’s win, added to their losses.
Dubravko Lakos-Bujas, head of U.S. equity strategy at JPMorgan, attributes that to the fact that Trump’s win reinforces, and even accelerates a factor in play since mid-year: rising bond yields. They began rising as both the European Central Bank and the Bank of Japan elected not to expand their bond buying, and a Federal Reserve rate hike started looking more likely. Trump’s win adds the possibility of real growth to the mix, and that caused the 10-year Treasury to reach its highest level since January. The jump in yields gave a further boost to certain stocks, while punishing those dependent on yields staying low in perpetuity. “There’s now a chance of a growth injection,” Lakos-Bujas says. “That has caused a more drastic rotation.”
And perhaps prepped the market for more gains. Lakos-Bujas now sees the S&P 500 hitting 2,300 by early 2017, up more than 6% from Friday’s close.
(Source: Barrons Online)