Animal spirits have returned to the markets, at least temporarily, as there have been major shifts since the U.S. presidential election. While there is still not a lot of clarity on the details of President-elect Trump's policies, expectations are that much needed tax-reform, a reduction in excessive regulations and new infrastructure spending will give economic growth a shot in the arm.
Stocks and Bonds
U.S. stocks have rallied, led by small-caps, financials and industrials all gaining over 10%.
Bond prices have plummeted sending interest rates swiftly higher, with the yield on the 10-year U.S. Treasury rising from 1.74% before the election to 2.49% today.
Many financial pundits have been predicting a rise in interest rates every year for the past five or six years. Up until now that has not been the case with interest rates hitting an all time low this summer.
As a result of low rates, stocks like consumer staples, utilities, telecoms, as well as corporate bonds and government bonds have outperformed since 2010 as investors chased higher dividends and interest income. Short-term rate increases in interest rates during this time provided buying opportunities for these investments. Since the election these investments have been sold off by the market and if interest rates continue higher the low-rate/low-growth playbook that was so profitable for so many years could continue to be under pressure.
Oil has surged to $51/barrel aided by OPEC members agreeing to to cut oil production for the first time since 2008. U.S. oil hit a low of $26/barrel in February 2016 before rallying. Since March, oil has traded in a range between $43 - $52.
While the OPEC agreement is a good sign for oil prices going forward, there are doubts about whether the countries involved will stick to the agreement. Also, with the recovery in oil prices U.S. production is expected to pick up, offsetting some of OPEC's cuts. Many analysts believe a range of $50 - $60 would be beneficial for the U.S. economy moving forward.
The NFIB, which surveys small businesses on a monthly basis, reported in November that small businesses are the most optimistic about their new hiring plans than they have been in over ten years.
From the Wall Street Journal:
Consumer confidence reached a nine-year high in November with The Conference Board's measure jumping to 107.1, up from 100.8 in October, far outpacing economists expectations of 101.8. Consumers tend to spend more when they are upbeat so this report is positive for holiday retail sales.
It remains to be seen how markets will perform moving forward. In December the Federal Reserve will meet and are expected to raise interest rates a quarter point. What the Fed says about their plans for 2017 will be closely watched. Coming up December 4th Italy is holding a referendum, which if voted down will lead to the resignation of their Prime Minister. Following in the footsteps of Brexit and the U.S. Presidential Election, we expect the No vote to win.
It is expected if No wins there could be a vote in Italy next year to determine if Italy will leave the Eurozone.
We are in the process of making necessary adjustments to our portfolios and will continue to track all developments both here in the U.S. and abroad.