November was an interesting month in the global financial markets, as the election in the United States caused a sell-off in treasury bonds and a strong rally in the broad stock market indices – the S&P 500 (INDEXSP:.INX) was up 3.7% for November. Expectations for fiscal stimulus have been set quite high, it seems that the new administration will have to deliver robust policies to avoid disappointing.
In addition, there is a problem with rising interest rates, as they hurt the real estate market, so President elect Trump will have to find a way to provide stimulus that is ‘not too hot not too cold.’ If interest rates move up too quickly in anticipation of a recovery, they could undermine the real estate market and in turn derail the very recovery they were anticipating. Keep an eye on those treasury bonds (NASDAQ:TLT)
Here’s the latest, by the numbers:
Stocks & Bonds
Treasury Bonds have been selling off after the summer in anticipation of the fed raising rates. And this sell-off accelerated after the election. Many U.S. stocks rebounded strongly after the election, but talk of a strong dollar had strongly negative consequences for most emerging market stocks, and also many in Japan and Europe.
Commodities & Currencies
Oil prices jumped 5.5% in November, in anticipation of an OPEC deal. For the year, they have risen over 15% to almost $50 per barrel. Even with OPEC promises, analyst consensus is that production cuts need to be large and sustained to make any lasting impact on prices. Gold prices (NYSEARCA:GLD) declined almost 8% in November, as safe-haven assets in general were sold after the election. Year-to-date the yellow metal is still up about 10%.
The U.S. dollar jumped just over 3% in November, reversing its minor loss for the year, and is now up almost 3% year-to-date.
The ISM Manufacturing PMI in November came in at 53.2%, showing accelerating growth from the previous month. The non-manufacturing, or services, index came in at 57.2%, which also shows increasing expansion from the previous month. With both goods and services, growth looked better in almost every category. a slower reading than the previous month, but strongly in positive territory. The Commerce Department released its second estimate of third quarter GDP growth, and revised its initial estimate upwards from 2.9% to 3.2%. Basically, both companies and individuals are spending a little more money. The federal government is also spending a little more money, although state governments are spending less. The National Association of Realtors reports that existing-home sales in October 2016 were 2.0% higher than in October 2015. In addition, the median price increased 6.0% to $232,200. This marks over 4 ½ years of rising median home prices. Distressed sales (foreclosures and short-sales) crept up to 5% of the market in October, although they are still near a decade low of 4% set last month.
The market is digesting the surprise win of President-elect Trump, and one of its biggest worries seems to be the rising rates associated with higher growth. Banks benefit from higher interest rates – their stocks as a group soared after the election. Long-term bonds suffer from higher rates – their values declined precipitously after the election.
I do not think President Trump, or any other president, has the power to reverse the systemic deflation in our economy, which studies show is largely associated with the aging of the baby boomers. But you don’t have to take my word for it – let’s look back in history to the last time a populist president was elected, a Washington outsider, a man with a vision to stimulate the economy. You know – President Obama.
Trump talks about a $1 Trillion stimulus package to boost the economy. President Obama signed The American Recovery and Reinvestment Act of 2009 into law on February 17th, 2009. The approximate cost of this plan was $787 Billion, and it was designed to boost the economy. Results of this stimulus are hard to judge – Democrats point to millions of jobs created while Republicans claim that any impact, large or small, was fleeting. The CBO looked at trying to judge the impact, and finally issued a report that essentially said ‘no comment.’
Since the bill was signed into law, inflation has continued to be a non-factor, and bonds have performed just fine as an asset class. The yield on the 10-Year Treasury was about 2.4% when President Obama signed his stimulus bill into law in 2009. Today, after jumping in anticipation of President Trump’s stimulus package, the yield on the 10-Year Treasury is, you guessed it, about 2.4%. This is after dropping below 1.5% earlier this year, as the economic ‘recovery’ continues to be anemic and slow.
The problem for President Trump as he tries to shake up the status quo in Washington, is that many people benefit tremendously from the status quo. We live in the wealthiest country in the world, with robust social benefits. Lower taxes are relatively popular and easy to pass, so I do believe that there will be some mild stimulus in the near future. However, systemic change will be harder to implement. Which Republican senator is going to vote for a bill that drastically reduces federal spending in his or her district? Which Democratic senator will do the same? I do believe some change is possible, but I believe Trump’s actions will ultimately be much less impactful than his words.
Thanks for reading.
This material was prepared by Greg Naylor, and all views within are expressly his. This information should not be construed as investment, tax or legal advice and may not be relied upon for the purpose of avoiding any Federal tax liability. This is not a solicitation or recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. The S&P500, MSCI EAFE and Barclays Aggregate Bond Index are indexes. It is not possible to invest directly in an index. The information is based on sources believed to be reliable, but its accuracy is not guaranteed.
Investing involves risks and investors may incur a profit or a loss. Past performance is not an indication of future results. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Listed entities are not affiliated.
- www.standardandpoors.com – S&P 500 information
- www.msci.com – MSCI EAFE information
- www.barcap.com – Barclays Aggregate Bond information
- www.bloomberg.com – U.S. Dollar & commodities performance
- www.realtor.org – Housing market data
- www.bea.gov – GDP numbers
- www.bls.gov – CPI and unemployment numbers
- www.commerce.gov – Consumer spending data
- www.napm.org – PMI numbers
- www.bigcharts.com – NYMEX crude prices, gold and other commodities
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.