Rhythm & blues singer Dinah Washington won a Grammy in 1959 for her version of “What a Diff’rence a Day Makes”, a 1934 composition by Maria Grever. The song has been covered by many artists over the years, and appears regularly in romantic comedy movies. To me, it’s an “earworm” song; one that gets stuck in your head long after it’s heard.
It came to mind while observing market behavior following the November elections. Remember in late October the Dow Jones Industrial Average recorded seven consecutive down days? That was a streak not seen in several years. The rationale was that the polls were tightening and the markets dislike uncertainty.
Secretary Clinton was a known quantity and, although not a particular friend to the financial markets, someone who would maintain the status quo. Mr. Trump, in contrast, was a well-known developer and reality television star but a complete cipher to professional investors, politicians, and pundits. Markets moved toward “risk off” status as investors contemplated an extension of Mr. Trump’s brash personality to global relations, the broad economy and control of the military.
The ultimate step back came late election night as the major battleground states fell to Mr. Trump. Dow futures were down about 1000 points at the trough, and foreign markets were likewise battered. Paul Krugman, a Nobel Prize-winning economist and writer for the New York Times, wrote early in the morning on November 9: “If the question is when I think the markets will recover, a first-pass answer is never”. While no one ever confused Paul Krugman with a neutral observer of politics or economics, his increasingly panicked views represented those of a significant portion of investors at the time.
So here we are a month later. The Dow is knocking at the door of 20,000, consumer confidence is leaping upward, and long term interest rates are behaving as if higher growth and rising inflation are just around the corner. What happened?
Fundamentally, not much –yet. The prospects for tax reform and the very visible announcements of Carrier, Softbank, and U.S. Steel are pushing growth and employment expectations up. None of these will alight January 21; their impacts will be gradual, spread over many years. Interest rates will rise as the Fed normalizes monetary policy, but in the absence of noticeably higher inflation (and that’s nowhere on the horizon), the last few weeks probably represent the worst for bond prices for the time being.
This gradualist view of the implementation of a more business- and investment-friendly environment in Washington is also at odds with the behavior of the stock market since Election Day. Valuations are as stretched as at any time back to the technology bubble in the late 1990s. This doesn’t mean prices will collapse, or that a bear market is upon us, just that many of the near-term opportunities have already been realized. Stocks are still the place to be for the long term, but don’t be surprised if they “mark time” as earnings and business conditions catch up.
Prior to the election, 2016 was shaping up to be a fair year for stocks and a mediocre year for bonds. The bond outlook hasn’t changed, but with a couple of weeks left, we’re very pleased with the equity returns being recorded. It’s all because of what occurred November 8.
As the song says…
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