Last Tuesday, many Americans watched in great surprise as Donald Trump won our presidential election. Just that day, the New York Times had placed Hillary Clinton's odds of winning at 85%, based on a range of state and national polls. But, like the Brexit vote this past June, 2016 seems to be the year of unexpected outcomes.
As predicted, the markets initially reacted to uncertainty as they often do: with losses. Futures for the Dow, NASDAQ, and S&P 500 all dropped at least 4% in the middle of the night after Trump's win. But come Wednesday morning, everyone was in for another surprise.
Despite many predictions that the markets would sell-off if Trump won, all of the major U.S. indexes ended the week ahead. The S&P 500 was up 3.80%, the Dow gained 5.36%, NASDAQ increased 3.78%, and MSCI EAFE added 0.05%. The Dow even closed at an all-time high on Thursday and posted its best week since 2011, despite being slightly down on Friday.
Needless to say, these two developments last week were significant surprises for most people. Let's look a bit deeper at the market's reaction and what may lie ahead.
Understanding the Rally
The markets hate uncertainty, but they love economic growth. After Trump's win, investors saw potential for decreased corporate tax rates, individual income taxes, and government regulation - plus increased infrastructure spending. All of these changes could help drive economic growth.
When you look at which sectors outperformed, you can see who investors believe may benefit from a Trump presidency:
- Biotech jumped nearly 16% on expectations that Trump may not fight price increases as Clinton would have.
- Financials increased 11.33%, because increasing interest rates, deregulation, and infrastructure projects would serve them well.
- Industrials were up 7.96%, which would benefit from infrastructure projects.
Seeing Beyond Stocks
While the major markets posted impressive gains, gold had its worst week in three years, losing roughly 6.2%.
A multitude of reasons come into play, but one stands out most clearly: If Trump is able to hold to his promise of $1 trillion in infrastructure spending, inflation will likely pick up and the Federal Reserve could significantly increase interest rates during that time. As a result, gold's appeal would lessen as other investments offer a more attractive income yield.
Analyzing What's Ahead
Right now, the election is fresh on everyone's minds and directly affecting the markets. But like all major events, another one will eventually capture our attention. As we stand now, the fundamentals tell us that the economy is performing well. Unemployment is at only 4.9%, hourly earnings are rising, and GDP is growing. Thus, there is a good chance that the next big event on the financial horizon is a Federal Reserve interest rate increase in December.
If the Fed does choose to increase rates, we may see additional volatility in the short-run - but the underlying data shows us that the economy is fundamentally strong.
Looking to the Long-Term
Seeing last week's market performance might make you want to find even more ways to capture growth. Remember - just as in down cycles - emotion has no place in investing. We are here to help guide you through these tumultuous times and keep a tireless focus on achieving your long-term goals.
The markets and our political environment may be full of surprises, but our goal is to make your financial life as peaceful and comfortable as possible.
Quote of the Week
"The two most important days in your life are the day you are born and the day you find out why."
Golf Tip of the Week
Drill For Better Balance
Developing a good kinesthetic awareness of your body in space is key to playing a solid round. Focus drills help clear your mind and encourage your body to "feel" its way through each swing. Trying to force a certain result can lead to inconsistent play and frustration.
One of the most important components of a good swing is balance, and incorporating a focus drill before you play can help you loosen your body and avoid distracting thoughts during your swing. Try the following drill to boost focus and balance before your next round of golf:
Without using a ball, set your feet together and take a couple of full, easy swings. Keep trying until you can easily hold your balance. Then, lift your left foot, and do the exercise again, balancing on your right foot. Harder, isn't it? Now try the other foot. Your goal should be to get a feel for the swing's motion and learn to adjust your body to stay balanced. To make the drill even harder, close your eyes while swinging.
Financial Question of the Week
How should I react to stock market volatility?
We recommend reacting calmly and without panic in response to short-term stock market volatility. We believe investors should have an adequate understanding of investment risks and take a long-term approach to their investments.
In light of market volatility, we may take advantage of rebalancing opportunities, but it is important to keep your long-term goals in mind.
If you have friends or family members who are unsettled by swings in the market, we would be happy to speak with them about strategies they can use to protect their portfolios in uncertain times.