Weekly Commentary, 11/7/16 to 11/11/16
The surprising win of Donald Trump, like Brexit, helps to demonstrate why at Stadion we don’t attempt to predict market, economic or political events. Heading into the election most prognosticators and pundits were predicting a Clinton win along with Republicans maintaining control of congress leading to another four years of Washington, DC gridlock making it unlikely we would see significant changes in tax, monetary or fiscal policies.
The initial overnight reaction to a Trump win was a quick and severe decline. The Dow Jones Industrial Average lost almost 800 points only to recover Wednesday and tack on another +1.40%, a swing of almost 1,200 points. U.S. stocks posted impressive gains for election week. The Russell 2000 Index was the big leader surging +10.18%. The Dow Jones rose +5.36%. The S&P 500 Index and NASDAQ Index each gained +3.80%
Financial markets seem to be assuming Trump will be successful implementing tax cuts and public spending programs that lead to faster economic growth. The Committee for a Responsible Federal Budget estimates Trump’s plan would increase the U.S. government debt by $4.6 trillion. Fearing inflation and greater fiscal stimulus (versus eight years of monetary stimulus) yields moved higher. The interest rate on the benchmark U.S. 10 Treasury note spiked to 2.11% from 1.81%. Yields on German and U.K. debt also climbed and are now at pre-Brexit levels. Bond proxies were also hit by the higher rates. Utilities dropped -4% and consumer staples shed -2%.
Market technicals improved over the week. Advancing stocks in the S&P 500 outnumbered declining stocks 3-1. After testing the 200-day moving average the previous week, the S&P 500 is now trading well above its 50-day and 200-day moving averages and is now only 1% away from the all-time high.
The Trump win quickly changed investor sentiment. The market’s initial surge may eventually slow as investors catch their breath and digest the full impact of a Republican-controlled government. Where will we go from here? Are we entering a period of enduring optimism that will extend an already stretched business cycle? Will Trump’s fiscal stimulus end the 30-year bull market in bonds? Regardless the response to those questions, Stadion will continue following our long established investment processes, adjusting asset allocations as events unfold. Entering this new era, it is likely the markets will experience periods of volatility and we believe it is important to include strategies that incorporate ongoing risk management.
Past performance is no guarantee of future results. Investments are subject to risk, and any of Stadion’s investment strategies may lose money. The investment strategies presented are not appropriate for every investor and financial advisors should review the terms and conditions and risks involved. Stadion’s actively managed portfolios may underperform during bull markets. Some information contained herein was prepared by or obtained from sources that Stadion believes to be reliable. There is no assurance that any of the target prices or other forward-looking statements mentioned will be attained. Any market prices are only indications of market values and are subject to change. The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock price. The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. It is the most widely quoted measure of the overall performance of the small-cap to mid-cap company shares. The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market and it is highly followed in the U.S. as an indicator of the performance of stocks of technology companies and growth companies. It is not possible to invest directly in indexes (like the S&P 500) which are unmanaged and do not incur fees and charges. The U.S. 10-Year Treasury Note is a debt obligation issued by the United States government that matures in 10 years. The Sharpe ratio measures the excess return per unit of deviation, or risk. The core personal consumption expenditures index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices. Any references to specific securities or market indexes are for informational purposes only. They are not intended as specific investment advice and should not be relied on for making investment decisions.
Past Performance is no guarantee of future results. Investments are subject to risk, and any of Stadion's investment strategies may lose money.