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Election and Markets Surprise Just About Everyone


Politics and the financial markets aligned 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 Tuesday’s voting, few had assessed a real probability of Donald Trump’s presidential victory. While the past 60 years has 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. Overseas and pre-market trading here in the U.S. were immediately caught off-guard.

However, what transpired in the day to follow provided perhaps even more of an unexpected turn. As Trump’s victory became increasingly apparent throughout Tuesday night’s vote count overseas markets plunged and Dow Jones futures sank to the tune of more than 800 points. In our opinion, this initial  reaction was one of uncertainty 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 election coverage, the day to come looked like it would certainly be a rough one for investors.

Keeping with the element of surprise, stocks opened close to flat Wednesday morning and then quickly turned positive. Momentum built throughout the day with the Dow closing +256 points (1.4%). The S&P 500® and NASDAQ also moved higher by more than 1% leaving many to wonder how one trading session could reverse course seemingly just as quickly as had the fates of Trump and Clinton the night before.

How did this happen? Here are some of our thoughts:

  • There was in our opinion an initial belief that if stocks corrected too much the Federal Reserve would likely take their expected December rate hike off the table. This was evidenced by approximately a .15% decline in the 10 Year Treasury yield prior to early morning trading. (Bear in mind that rates subsequently reversed themselves and moved higher throughout the day as stocks recovered).
  • Recognizing that the White House and both chambers of Congress would all soon be under Republican control, we feel the market also began to rally on the prospect of 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 quickly provided a silver lining within the initial concerns of Trump uncertainty and nervousness.
  • Individual sectors of the market quickly reacted extremely favorably to potential industry specific changes under the new administration. This included bank stocks which rose on average about 5% as the prospect of a steepening yield curve and less government regulation was well received, and biotechnology stocks, which on average jumped close to 9% as concerns of Clinton induced drug pricing constraints fell by the wayside. As these sectors rallied hard it likely spilled over to the broader market.
  • As previously mentioned, interest rates rose considerably throughout the day following their pre- trading decline as the 10 year Treasury yield spiked close to .20% by day’s end to reach 2.07% its highest level since January. While this was at first attributed to widespread selling based on the premise that the U.S. might no longer be the safe haven most have believed it to be, we think this rise in interest rates was more due to expectations that fiscal spending and lower tax rates under a Trump administration could create an inflationary environment higher than anything we have seen in recent years. There was also speculation regarding the tenure of Fed Chair Janet Yellen under the new administration and that Mr. Trump’s first appointments to the Fed in early 2018 would likely be more hawkish than the committee’s current composition.
  • We would however caution against the notion that yesterday’s spike in bond yields will in and of itself pull us out of the current lower for longer interest rate environment as we are still below beginning of the year levels and there is much to be considered in the days ahead as we await the implementation of the Trump economic agenda. Given that we did not see the selloff expected at the market’s open and that stocks are now within a stone throw of all-time highs, we believe the Fed will likely hike rates at their upcoming December meeting. However, should such downside volatility emerge in the days ahead, the Fed’s apprehension to disrupt equity markets could jeopardize such an expected move. (It would of course be nice if this Fed did not make us feel they are dependent on market conditions to implement monetary policy, however, based on their actions, or inactions, since last December this is not the case.)

Markets in the weeks ahead will clearly be focused on the perceived impacts of the new administration, complete with the inevitable debates as to their effectiveness and / or risk. Remember, just two days ago the markets were expecting pretty much business as usual from Washington and now we have anything but that. There very well could be volatility comparable to what was believed to be the case late Tuesday night, 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 is currently digesting about a Trump administration simply adds 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, lower than expected GDP growth in 1H16, and Brexit last June. In each of those cases, the market absorbed the “event” with some volatility and then moved higher.
  • We also believe 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 are improving GDP growth and corporate earnings trends as we enter 2017. The first estimate of 3Q GDP released on October 28 displayed 2.9% growth, better than twice the level throughout 1H16, and we believe 2017 could be a year of double digit profit growth for the S&P 500® .
  • Looking forward, much focus will now be placed on who Mr. Trump surrounds himself with in his new administration and precisely who his cabinet will be. As experienced and qualified candidates potentially come to the forefront, this should also help to alleviate future market concerns.

Finally, we believe this 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 has nonetheless shown 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.