5i Research Blog
Nov 19, 2016 State of the Markets after the Trump Election Result
After taking a look at what a Trump Presidency may mean to Canadian investors and now that markets have had a bit of time to digest the surprise result, we wanted to go through some of the shifts that have occurred in markets recently, and there were a few!
Interests rates have really started to move…
Some of the climb is due to an increased likelihood of the FED raising interest rates in December, while some of it is due to an expectation of more inflationary policies coming from the government (and forcing the hand of the FED to further raise rates). Regardless of the reason, rates ar moving and this is having spillover impacts in other areas of the markets.
Which has led to investors leaving higher income investments…
The areas that investors have sought for safety and dividends in the past have seen weakness as of late as investors seek higher growth opportunities. As rates move higher, the relative attractiveness of dividend stocks also decreases, as some investors take risk off of the table and invest in fixed income that now offers more reasonable yields.
And seek out areas that will benefit from more growth…
Particularly the infrastructure, biotech, financials and small-cap space, but for differing reasons. Infrastructure saw some strength under the idea that government spending is on pace to rise dramatically. Biotech has likely seen some strength as a Clinton presidency was being viewed as negative to the biotech space given her views toward pricing policies. Financials rallied with the prospects of higher rates (which are generally positive for banks if rising for the right reasons) but also the idea of de-regulation in the space. Finally the US small-cap space, represented by the Russell 2000 saw some strength more than likely due to risk seeking behavior than any specific reason. The important thing to note here is that a lot of these moves are on speculation of what will happen. No one really knows what the composition of any infrastructure spending will be nor is there a guarantee deregulation will occur. The other side of the coin here is that someone needs to pay for things like government spending, and where the additional income will come from, in the midst of proposed tax cuts, is unclear.
…but don’t believe the hype.
Some of the shipping companies such as Dryships saw a meteoric rise only to come crashing down. While this bubble popped sooner than many had likely thought, it is a great reminder that fundamentals are and remain important to share prices.
All of these events have led to an interesting move in a market signal known as the FED Model. Subscribers can login to see our thoughts on the FED model and what it may mean for the markets. Not a subscriber? Join here.