Wednesday, November 09, 2016

The Market The Day After The Election: Emotion Versus Fundamentals

In Monday's post I highlighted the importance of separating ones politics from their portfolio. The market's reaction to yesterday's election outcome is a perfect example why this is important. As election results trickled in last night and it became apparent Donald Trump would be the 45th President of the United States, equity futures sold off sharply. The day after election sell offs are not unique. The market sold off 2.4% after the 2012 election and sold off 5.3% after the 2008 election.

The Dow futures were down over 860 points at one point early this morning. In spite of this initial negative reaction, today the Dow Jones Industrial Average closed up 256 points at 18,589 after reaching an intraday all time high of 18,650. At the end of the day, stocks will trade on fundamentals and whether or not one is a Trump supporter, his policy proposals could be very bullish for the economy and stocks. Today's market action is a reflection of this potential positive. Additionally, stock prices follow earnings and it looks highly likely third quarter S&P 500 earnings growth will be positive for the first time since Q1 2015. Q3 2016 earnings growth is tracking to be up 3.9% and 7.5% ex-energy.

The bond market sold off rather sharply in a potential sign investors anticipate a faster pace of economic growth. The 10-year Treasury yield closed at 2.07% and is the highest yield since reaching 2.1% in January of this year.

The market will certainly not move higher in a straight line. Also, the Fed rate decision in December may also create some equity market volatility. However, the election outcome in and of itself may not be bad for the economy and thus could be good for stocks. Separating emotion from fundamentals remains an important characteristic for investors.

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