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Now What? Thumbnail

Now What?

The Market Post Election

The week of November 7th was the best week in the stock market since 2014.  In the two weeks prior to November 7th the market declined for nine consecutive days.   That was the longest stretch of consecutive down days since 1980.  It is fair to say that it has been quite a ride since we met a month ago.

Election week:  on Monday the 7th the Dow broke its losing streak and surged 371 points.  It appeared to respond to the Sunday evening announcement by FBI Director James Comey that Hillary Clinton should not face criminal charges after reviewing the new emails.  The market was saying Clinton will win.

On Tuesday, Election Day, the market went up again on the expectation that Hillary Clinton would win the presidency based on exit polling and media reports.  

On Wednesday, Thursday, and Friday the market went up after she didn’t win.  Last week was full of surprises.  It was a surprise that Trump won and it was a surprise that after he won the market went up.  Nothing worked out the way it was expected.  

Outperforming last week:       

  • pharmaceutical sector
  • banking and financial sector
  • transportation sector
  • insurance sector
  • industrial sector

Stocks declining last week:

  • hospitals subsector
  • utilities sector
  • consumer staples sector
  • REITS

Alternative asset classes:

  • bonds are down
  • gold is down
  • dollar is up

Rationale

The market is looking at a President Trump Administration as pro-business.  The policies promised in the campaign such as lower taxes, less regulation, and a fix for the healthcare sector are all changes which are expected to bring growth back into the economy and a better stock market.  The stocks which have responded positively to the election results in just one week include those that are likely to benefit from a change in healthcare, a program to rebuild the infrastructure, lower taxes on business, fewer regulations and an increase in interest rates.

The stocks declining since the election are those likely to be hurt mainly by rising interest rates.   When interest rates rise, bonds decline and the dollar goes up.  Rising interest rates usually are accompanied by inflation and gold is an inflation hedge.   Most of the time bonds and gold do not move in the same direction, but they have tracked together most of this year.   Gold is not only an inflation hedge, it is also viewed as a safety asset class and hedge against a falling stock market.

The current chart of the Dow is bullish.  It traded under 18,100 points for most of the eighteen months from December 2014 to July 2016.  That is an unusually long time for a sideways market and tested the patience of investors.   

You may remember that after the BREXIT vote in Great Britain, world markets declined sharply for a couple of days and then headed up with strength.  Within a week, the Dow reached a new all-time high in July 2016 of 18,600.  Since that surge, 18,000 has appeared to become a floor instead of a ceiling.   This is demonstrated on the Point and Figure chart on the next page.

In the week since the election the Dow has climbed to over 18,900 and is very close to 19,000.  This action is bullish and we are cautiously optimistic about the market from here.