Author : John E. Charalambakis
Date : November 9, 2016
As the results of the election kept coming in on Tuesday night, the futures markets indicated a turbulent opening for Wednesday. However, as the morning hours were unfolding and as the closing indicates, we had a complete reversal with the Dow Jones Industrial Average swinging from a negative 800 (futures on Tuesday night) to a positive closing on Wednesday of about 250 points above previous day’s closing. In a nutshell, the markets did not know how to react to the incoming Trump administration and the policies that will accompany them.
We are of the opinion that in the short term there are five things that may be unfolding:
First, we predict a reflation effect on the markets which will affect positively particular sectors while mildly pressuring the debt markets.
Second, despite the fact that the markets perceive the Fed as a lame-duck that will refrain from raising rates, we believe that in December rates will be raised.
Third, due to lack of specifics the bond market will exhibit greater volatility, especially if economic reflation is demonstrated through expansionary fiscal policy and the Fed raises rates.
Fourth, the rise of protest vote may show again its strength in Italy on December 4th which will create an interesting alliance between Euroskepticism and the incoming administration.
Fifth, if policy lacks specifics or takes a wrong turn, then a market correction may ensue that will seek safe havens and reduce the pressure on debt markets.
Now, and in continuation of last week’s commentary that attempted a preliminary assessment of the possible consequences of a Trump victory, here are the possible effects on particular sectors:
– An expansionary fiscal policy should positively affect industrials, the defense sector, and companies that are involved in infrastructure projects
– A regulatory environment that imposes lower burdens should positively affect pharmaceuticals. The fact that the healthcare sector has not performed well in the last year may also be an additional factor for capital inflows into that sector
– Financials may be able to do well because of higher rates, less regulation, and an overall economic reflation demonstrated through higher spending
– Exporters may be facing some challenges as globalization is questioned
– Commodities may go sideways as the dollar strengthens
– The debt and credit markets may experience some pressures
– Emerging markets in general and Asian markets in particular will have an additional opportunity cost on their shoulders on top of their endemic problems
– Precious metals and pertinent mining stocks could benefit due to the general reflation, as well as due to their safe haven nature if things turn out not to be as expected
– M&A activity could boost the tech sector as will capital deployment
– Utilities and fixed income securities may be experiencing challenges as yields rise
– Consumer-related sectors have some upside potential due to reflation
– The global economic and financial landscape is facing significant challenges due to unsustainable debts, the derivatives structure, unfunded liabilities, shortage of good collateral, and dysfunctional policies (to name just a few of those challenges).
Would the incoming administration be able to say like the Sipyphus of the old days “I still can lift up the rock to the top of the mountain”?