With the Election Behind Us, What is Next for the Stock Market?

With the election behind us, the uncertainty which was a cloud over the markets for the last couple of months is removed. Now we need to look forward and evaluate how the policies of the new administration could impact the markets.  

The day after the election the stock market went up, bond prices went down, the dollar went up, and gold, silver and precious metals went down.  

Since November 5th the three major stock indexes, the Dow Industrials, the S&P 500 and the Nasdaq Composite, have posted new all-time highs.  The two most likely reasons for the strong stock market are the anticipation of lower corporate tax rates and a relaxed regulatory environment.   Both are good for corporations and good for the stock market.  

Investors sold bonds following the election in exchange for riskier assets such as stocks.  When investors sell bonds, the price goes down and the yield goes up.  The yield on the benchmark 10 year US Treasury started climbing in mid-September at the same time as the Fed cut the short term rate by half of a percent. Rising bond yields was out of step with the rate cut by the Federal Reserve Board.   The Board lowered the short term rate another quarter point the day after the election.  There is a clear message from the bond market that rates are likely to remain higher.  

After the election the dollar spiked to the top of its two-year trading range in relation to other world currencies.  It is not unusual for the dollar to move higher following a presidential election, and since November 22nd it has pulled back some as the Euro has strengthened.  The dollar is entering its weakest period of the year.  A weaker dollar would support both the stock market and the price of gold.   We are watching this development to see where it goes from here.  

Gold peaked at the end of October, just days before the election.  In the two weeks following the election the price of gold fell.  It found support in mid-November at its August price and in the last couple of weeks it has regained about half its November losses.  Now it is moving sideways.   Gold often drops in price when the dollar and bond yields rise.  This looks like a healthy consolidation after a strong run up.   We expect gold and other precious metals will eventually resume their uptrend.  

We continue to see confirmation of the rotation in leadership away from technology stocks into value oriented sectors such as financials and energy.  This does not mean that technology will not do well.   It means that other sectors will most likely outperform technology if inflation is persistent and interest rates remain higher.

Breadth and broad participation across the stock market remain strong which are good indicators for the market.  Our outlook is optimistic going into the new year, however, there are still significant headwinds facing the market which include inflation, the national debt, and geopolitical pressures.  

Written by Connie C. Guelich, CFP, AEP, CLU, ChFC. This represents our views at the time of this writing, and it is subject to change. It is not intended to be personal investment advice. If you would like to discuss your own account, please don’t hesitate to call us.