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Clarity in Sight

November 8, 2016, 4:33 pm

Presidential elections are often a weight on stocks, but this one has been an unusually heavy load. It’s not that the market tanked, but it was stuck in a tight trading range for nearly three months and has slipped the last two weeks as pre-election anxiety increased. It’s been a long and eventful political season, but one way or another, the shadow should be well on its way to passing less than 24 hours from now.

At some point tonight or early Wednesday, we should know how the votes played out. Given the nature of this campaign, it’s a little hard to tell what the market’s immediate reaction will be, but I do think Wall Street will feel that a big burden has been lifted. I also think we will see that reflected in trading through year-end.

Amid all of the election hoopla, the fundamentals for a rally have been setting up quietly backstage. Last Friday’s job creation numbers proved once again that the consumer sector keeps spinning out both paid positions and even showed the strongest wage inflation since the 2008 crash. Americans are not getting laid off in vast numbers, and we’re collectively getting a little more money to spend.

Meanwhile, corporate profits have been more resilient than many expected. Chances are better with each passing week that we will see earnings growth this reporting season for the first time in five quarters. Sprawling enterprises like Williams Companies (WMB), Pioneer Natural Resources (PXD) and Advanced Micro Devices (AMD) that were bleeding cash a year ago are now back in the green. I think we’ll see names like these lead the way.

It’s important to remember that sentiment circles around and can change on sometimes crazy headlines, but the fundamentals always anchor the action. When the mood turns, established strength usually recovers fastest, and that’s where you want to be.

The fundamentals were also what the Federal Reserve was watching last week when it hinted that interest rates will be raised soon, most likely next month. The economy has finally passed all the Fed’s tests: unemployment is low enough to qualify as “full employment,” gross domestic product (GDP) is on the rise and now that oil prices are higher – even with the recent pullback – inflation needs to be kept in check.

Behind all the headlines and chatter in the coming days, that’s the pulse I want you to follow. Eight years after the financial crisis and recession, the Fed finally sees the economic risk tilting from stagnation to inflation. It takes a healthy economy to generate enough inflation to force the Fed to raise rates. A healthy economy feeds back into corporate activity, driving profit growth.

For the fourth quarter, Wall Street is anticipating the small increase in earnings we’re seeing now will turn into 4.6% expansion. When 2017 rolls around, rebounding energy companies, banks basking in a more supportive rate environment and just about every other corner of the market should contribute to double-digit growth for the first time in years.

 

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