Market Review from Sumner Wealth Management

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- NOVEMBER 2016 -

 
 

 In This Edition:

  • TRUMP: What might Expect
  • US Economy
  • International Economy
  • My Thoughts
  • About SWM

 

 

Market Performance

Stock Market

QTD (OCTOBER)

 YTD

1 YEAR

 Total U.S. Market1  4.40%  8.18%  14.96%
   Domestic Large Cap Equity2  3.85%  7.84%  15.43%
   Domestic Small Cap Equity3  9.05%  11.46%  15.47%
 International Equity4  6.91%  5.82%  9.26%
   Developed International Equity5  6.43%  1.73%  6.52%
   Emerging Market Equity6  9.03%  16.02%  16.78%

Fixed Income

QTD (OCTOBER)

 YTD

1 YEAR

 U.S. Bonds7  0.46%  5.80%  5.19%
Cash Equivalent8  0.07%  0.19%  0.21%
1Russell 3000 2S&P 500 Index 3Russell 2000 Index 4MSCI ACWI ex-U.S. Index 5MSCI EAFE Index 6iShares MSCI Emerging Markets Index 7Barclays Capital U.S. Aggregate Bond Index 8Barclays Capital 1-3 Month U.S. Treasury Bill Index   
 
 

Dear Visitor,

Looking at the election strictly through the lens of the financial markets, I have always viewed the presidential race as a choice between a "low-vol" candidate—one who would maintain the status quo—and a "high-vol" candidate—one who promises massive change and would upset the status quo more than the other candidate would aim to preserve it.  What does it mean for investors? With change comes uncertainty, and if we know one thing about the markets, it's that investors don't like uncertainty. And that's what we have for now, as we wait for the president-elect to take office and announce his cabinet and policy specifics. So, it is not a surprise to me to see the market futures sell off on election night, but reverse those overnight losses the day after the election.

More importantly for investors, they emphasize that the bigger longer term drivers of stock and bond market performance are economic. And the U.S. economy is in decent shape with unemployment low, corporate earnings improving, and the global economy on the upswing. So, if you liked your portfolio strategy on Monday-and it reflected your circumstances, emotional tolerance for volatility, and financial goals-it is still the right one for you the day after the election, regardless of whom you wanted to win.

Trump:  What might to Expect

Longer term, I think Trump's win, particularly if he succeeds in implementing protectionist trade policies, is going to put significant downward pressure on domestic productivity growth. If you restrict the free flow of capital, labor, and trade, you're going to reduce the efficiency of markets, and that's going to reduce productivity rates and competition in markets. So the equity market selloff may be most pronounced for companies that have exposure to either foreign sales or foreign supply lines.

The only clear market winners I can see are sectors that benefit from a weak dollar. One possibility may be gold.I also expect we will see a large fiscal expansion under a Trump administration. With majorities in both Congressional chambers, Trump will be well positioned to get traction on many of his fiscal policies. As a result, I think we should expect to see a meaningful increase in the U.S. deficit. This may negatively impact interest rates, as the Treasury market could start pricing-in these developments. In the near term, however, the abrupt rise in policy uncertainty is appearing to result in investors shifting to the U.S. Treasury market as a 'safe harbor'.

Economy

Greater uncertainty by definition reflects a wider range of outcomes, and that requires a higher risk premium for stocks. A higher risk premium means a lower price-to-earnings (P/E) ratio. So, when I see the market trade lower, I view that more as a manifestation of investors repricing the uncertainty premium rather than as commentary on President-Elect Donald Trump's economic policies and their impact on the markets.

And there is considerably uncertainty, of course. Will the new administration cut taxes, move towards greater fiscal stimulus, cut regulations, and repatriate the $2 trillion in corporate cash idling abroad? Is it sort of a Reaganomics 2.0? If so, this could jump-start the economy out of secular stagnation, and that would be bullish for growth. If nominal growth starts to accelerate, that should be bullish for earnings and stock prices (even if it comes at a lower P/E multiple). But if the above comes with increased protectionism through tariffs on goods imported from China and Mexico, then what the market stands to gain on the one hand might be given back on the other.

At this point, the answer is unclear, which is why the market is likely to demand a higher uncertainty premium. But to me, this election outcome does not have to be seen as a one-way ticket lower for stocks. It could just as easily be the opposite. But one thing is certain in my mind—there will be twists and turns along the way. The quiet low-volatility days are probably over for a while.

International

The broad political climate of this election and other events, such as Brexit, have signaled that globalization trends are due for a slowdown. All else being equal, I think less mobile capital means lower real returns on capital, as companies are less able to take advantage of tax, labor, and resource inefficiencies in foreign markets. In turn, lower real returns on capital mean lower real interest rates and a weaker dollar.

President-Elect Trump has called for a large fiscal easing, personal tax deductions at the upper end of the income scale, and more defense spending. Even a limited implementation of these initiatives would increase the deficit significantly over the next decadeIn the short term, the environment of higher fiscal spending and less globalization should benefit TIPS, as investors anticipate rising inflation.

The impact on Treasuries is less clear, as anti-globalization pushes yields down and inflation up, while fiscal stimulus pushes nominal yields higher. Furthermore, I think there could be impacts on monetary policy-in particular, a Trump administration could have a more strained relationship with Federal Reserve officials. Trump says he would like to switch to a more rules-based monetary policy with less focus on zero interest rates, negative interest rates, and quantitative easing.

Thoughts?

When I step back and assess all these factors and the future, I think the policies/factors will push the U.S. economy further into the late-cycle phase. While we had been positively disposed toward global equities as a recovery in China and continued growth in the U.S. pay dividends for economies abroad, I don't think many expected this Trump win, so very little of this has been priced into the markets already. As a result, investors must be prepared to weather a negative environment for equities and fixed income.

We will probably have a rocky road ahead, but I am not in the camp that thinks this election outcome is a one-way ticket to a bear market.  More of an opportunity to "BUY" equities.

About SWM

Our firm assist individuals, families, and businesses in proactively preparing themselves for a broad range of financial decisions and life events by utilizing a team of specialized individuals to help our clients gain income protection, financial stability, and overall peace of mind for themselves and their loved ones.  We are an Integrated,  Wealth Manager Specialists. 


Mark Sumner
Financial Advisor

Sumner Wealth Management, Inc.                
517 Alcove Road, Suite 202                                            
Mooresville, NC  28117                      
(704) 660-5510  Ext. 401                                        
www.sumnerwealthmanagement.com                                  


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