Thursday, November 10, 2016

Toss Aside Your Political Leanings, The Equity Market Is

Tossing aside ones political leanings, the stock and bond market are telegraphing positive results from a Trump presidency as it relates to the economy. I briefly touched on the bond market in yesterday's post and below is another chart of the 10-year Treasury yield-the yield continues to move higher.

The broad advance in the market relative to the meltdown in futures during election night/morning seems to have caught investors off guard. Today the Dow Jones Industrial Average blew through its prior high in August of 18,636 to close at an all time record high of 18,807.

What is occurring is investors are rotating out of income oriented stocks, the dividend payers, like staples, utilities and REITs into the value and cyclically oriented industries in the market, like financials, energy, transports and industrials. These sectors tend to benefit from improved economic activity.

There is plenty of potential for a strong burst of economic growth with the policies a Trump administration desires to pursue in terms of tax reform, reduced tax on foreign earned income, reduced regulations, etc. I and many others have discussed the painfully slow rate of growth during the recovery that has followed the financial crisis. This below par growth has left a gap in actual versus trend line economic growth equaling nearly $3 trillion as can be seen in the below chart.  

The Trump policies have a high likelihood of putting the economy on a faster growth trajectory and hence a positive reaction by the equity market. A valid concern is the budget deficit and level of government debt. This must also be addressed; however, getting the economy growing and individuals back to work is a step in the right direction.

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