Calling All Bulls!
November 14, 2016, 4:29 pm
Very few things about the last week haven’t been surprising. First, Donald Trump defeated Hillary Clinton to become the next president of the United States. Then, the market rallied all week on the news. Even those few who had predicted Trump would win the historic election didn’t expect stocks to be higher the following days.
Those of you who were watching the futures market on election night saw the Dow drop over 800 points, and it appeared that there would be a bloodbath for investors on Wednesday. But lo and behold, by the end of last week, the Dow had hit a new record high.
That action tells me that investors were more concerned about moving beyond the election than finding out who the actual victor would be. Of course, the unknowns surrounding a Trump presidency are still something the market will need to contend with, but as I had anticipated (although it certainly occurred much sooner than expected), stocks are finally getting back to work.
A strong focus on the underlying strength of the economy and corporate America gives investors plenty of reasons to buy stocks right now more than any other asset class, and I remain bullish on the market in both the near and long term. It won’t be a straight shot up – it never is – but let’s talk about some of the reasons why I expect stocks to hit more new highs in the coming months.
Interest Rates: Given the results of the election, the Federal Reserve will need to be cautious when it comes to hiking rates in the next year. A new party in the White House could lead to more dovish monetary policy, but putting a lid on interest rates for now would certainly be bullish for stocks.
The Dollar: The U.S. Dollar Index was up big on Wednesday and is now trading close to an eight-month high. A strong currency is great for a country, but if it gets too strong it can negatively impact earnings of domestic-based multinational companies. As a result, I suspect the greenback’s upside is limited, which would remove any headwinds that appreciation in the currency could cause.
Taxes & Regulation: If Trump follows through on his campaign talking points, we could see less regulation and lower taxes for corporations as well as individuals. Both are a huge win for the stock market and are also a big reason why the financials are rallying post-election. The group as a whole is at its best level since 2008, and individual names such as JPMorgan Chase (JPM) hit new all-time highs. Bank of America (BAC) hit a high today that it hasn’t seen since 2008! A broad market rally could easily be led by the financials as they continue their breakout.
The End of Obamacare: It’s no secret that one of Trump’s main goals is to repeal Obamacare, and hospital stocks are taking a beating as a result. The hospitals have been huge beneficiaries of the Affordable Care Act, and if it ceases to exist it could be bad for the sector. However, considering health insurance premiums have been increasing at a rapid pace, the repeal could be a boon for small businesses as well as larger corporations. In the end, getting rid of Obamacare would be good for the economy.
Global Trade: This is my biggest fear about a Trump administration. All of his tough talk about trading with China and other countries helped him get elected, but his ability to actually do what he stated has yet to be seen. We expect the anti-trade rhetoric will soften in the coming months and that Trump will have to bend when it comes to his stance on trade, which would remove a big issue that has the potential to lead to a recession in the years ahead.
Pent Up Demand for Stocks: Heading into the week, the large hedge funds were sitting with 5.8% of their portfolios in cash, the highest level since 2001. That was fine with the election on the horizon, but now these funds need to earn their pay and put that money to work. They’ll be looking to put that money into the best asset class, which remains equities, so stocks should benefit nicely from money moving off the sidelines and back into the market. Trillions of dollars are ready to be deployed.
Republican Control: Contrary to what many believe, the market actually performs quite well when one party has control of the White House, Senate and House of Representatives. In fact, the stats show that two years after a new president takes office, a one-party government is the best set-up for stocks.
Presidential Figurehead: While the president is technically considered the most powerful person in the world, when all is said and done he is not a monarch. The checks and balances that our founding fathers created were designed to prevent that, and our system allows us to determine the strength of our country by an entire group of people. Sure, Trump will pick the majority of them, but I am confident that his team will put the United States on the right path.
Some of these factors will play out quickly while others will take time, and that’s okay. It’s good to have catalysts in place that have the potential to move the market in both the short and long term. And often times, those longer-term catalysts are actually the ones moving stocks today. By the time they come to fruition, the move has already been made.
There are plenty of underlying catalysts driving the market to new highs, and your goal should be to position yourself to take advantage of any breakouts that may happen along the way.