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The Election and the Markets: What Happened and Where from Here

ta_blog_1024x438_election The future of our government and the financial markets aligned this past week in a manner unlike any we have seen in several generations following the surprise election of Donald Trump as America’s 45th president. While clearly the final polls were close going into last Tuesday’s voting, few had assessed a real probability of Donald Trump’s presidential victory. While the past 60 years have seen its share of nail-biter election nights featuring the likes Kennedy-Nixon, Carter-Ford, and Bush-Gore, one would have to go all the way back to 1948 and Harry Truman’s upset of Thomas Dewey to find a contest in which the expected winner and loser so dramatically reversed fortunes over the course of just a few hours.

In the hours immediately following the final election results, pre-market trading of stock futures indicated a decline of more than 800 points on the Dow Jones. In our opinion this initial reaction reflected more uncertainty about a Trump administration rather than any great concern in our overall economic or financial system. It was eerily reminiscent of the market’s reaction to Brexit last June, both in terms of magnitude and speed of decline. As fears of a market crash were bantered about amidst the post-election coverage early November 9, the days ahead certainly looked as though they could be rough ones for investors.

However what has transpired in the days since has perhaps been even more surprising as equity markets have rallied with the Dow rising close to 4% and the S&P 500® about 2%. The Dow has now reached an all-time high and the S&P 500® is just off its record reached last August. Perhaps of greater note, interest rates have taken a sharp turn higher as the 10 year Treasury yield, which hit its all-time low of just less than 1.4% last July is now trading at 2.25% – almost .90% higher than last summer’s level, having risen almost .50% since Election Day.

How did this happen and what does it mean for the markets as we look forward? Here are a few thoughts.

  • We believe the stock market is agnostic to politics and has discounted Republican control of the White House and both chambers of Congress as having certain favorable impacts. Specifically, these would be less government gridlock, reduced regulation, and lower corporate tax rates. While many might argue these points, both in terms of whether they will come to fruition or be good for the markets, we feel these factors have quickly provided a silver lining to what the market had initially interpreted as a cloud of Trump uncertainty and nervousness.
  • Individual sectors of the market have also reacted extremely favorably to potential industry specific changes under the new administration. This has included bank stocks (S&P 500® Banks Select Industry Index +15%) as the prospect of a steepening yield curve and less government regulation has certainly been well received, biotechnology stocks (NASDAQ Biotechnology Index +11%) as concerns of Clinton supported drug pricing constraints fell by the wayside, and defense stocks (S&P 500® Aerospace & Defense Select Industry Index +9%), which of course stand to benefit from increased military spending. As these sectors rallied hard, it has spilled over to the broader market.
  • In regard to the upward move in interest rates, future Trump economic policy is currently being interpreted as more inflationary than any we have seen in over a decade as the potential combination of lower taxes, higher infrastructure spending and perhaps larger federal deficits would likely result in higher price levels throughout the economy.
  • We also believe the Federal Reserve (Fed) now has “cover” it did not have before regarding the market impact of raising rates. It has been our feeling that ever since its lone rate hike of last December, and the stock market correction that immediately ensued during January and February, the Fed has been reluctant to raise rates for fear of negatively impacting the equity markets. Now they no longer have to worry about that as rates have increased materially since the election and stocks have rallied in the process. We believe this will make the Fed feel less hindered to increase rates throughout 2017. Strange as it may sound, it’s almost as if the American voters did more for monetary policy in one day than the Fed had done in almost one year.
  • In our opinion there is a high probability of a Fed funds rate hike at the committee’s December meeting next month and this is now priced into the fixed income markets. Despite the difference in rate expectations today versus those of pre-election days, we would caution that rates have come very far very fast and we most likely see them as being range bound from here through the end of the year, at approximately 2.25% on the 10 year Treasury, give or take about .25%. Needless to say, economic and inflationary trends will be a major area of focus for investors in the New Year.

Markets in the weeks ahead will clearly be centered on the perceived impacts of the new administration’s economic agenda, complete with the inevitable debates as to its pending effectiveness or risk. Remember, little more than a week ago the markets were expecting pretty much business as usual from Washington and now we have anything but that. There could still be volatility comparable to what was believed to be the case in the immediate hours following the election, and if this does occur we believe investors would be well served to keep the following in mind:

  • We feel this is still a market that continues to climb a “Wall of Worry” and whatever uncertainties the market may confront about a Trump administration can be added to the list of what investors have been dealing with over the past year and a half. This has included China’s devaluation of the Yuan in August of 2015, recessionary fears during early 2016 (both of which resulted in double digit corrections in stocks), lower than expected gross domestic product (GDP) growth in 1H16, and of course Europe’s surprise Brexit vote last June. In each of those cases, the market absorbed the “event” with some volatility and then moved higher.
  • It has also been said that the market is “the great discounter of future events” and as it does discount those future events it fights through current ones. In this case the most important future events, present and accounted for prior to the election, are improving U.S. economic growth and corporate earnings trends as we enter 2017. Pertinent to this, the first estimate of 3Q GDP released on October 28 displayed 2.9% growth, better than twice the level experienced throughout 1H16. In addition, we believe 2017 could be a year of double digit profit growth for the S&P 500®.

Finally, it is vital to emphasize that this is as important a time as any in recent memory to maintain a long term investment focus. While we have just experienced an election unlike any other since the days of our grandparents, history nonetheless has proven that markets ultimately follow economic and profit cycles rather than political ones.


Tom Wald is responsible for overseeing the investment and mutual fund product development functions and sub-adviser selection process. He also actively publicizes Transamerica’s investment thought leadership and products to advisors, clients, and the media. Tom has more than 25 years of investment experience and has managed large mutual funds and sub-advised separate account portfolios. Tom holds a bachelor’s degree in political science from Tulane University and an MBA in finance from the Wharton School at the University of Pennsylvania. He has earned the right to use the Chartered Financial Analyst (CFA) designation. 

Investments are subject to market risk, including the loss of principal. Asset classes or investment strategies described may not be suitable for all investors.

The information included in this article should not be construed as investment advice or a recommendation for the purchase or sale of any security. This material contains general information only on investment matters; it should not be considered as a comprehensive statement on any matter and should not be relied upon as such. The information does not take into account any investor’s investment objectives, particular needs or financial situation. The value of any investment may fluctuate. This is a general perspective about market volatility and our market outlook and is not intended to predict future events. 

Transamerica Funds are advised by Transamerica Asset Management, Inc. and distributed by Transamerica Capital, Inc.