The election is over and democracy lives. It was fascinating to monitor the stock and bond markets in the days just before and after the election. In the two days leading up to the election, the pollsters and media had everyone convinced the outcome was known. The markets were comfortably braced for more of the same. The stock market rallied strong on Monday and again on Election Day. In the twenty fourth hour on Election Day, it became apparent voters had a different plan as Donald Trump was on the verge of becoming President-elect Trump. Immediately headlines began streaming: Dow futures down 300, Dow futures down 500, Dow futures down 800, five percent limit down on the S&P 500 futures. My final thought of the evening was, “Tomorrow will be a great buying opportunity.”

When the next day arrived, so did some rational thinking. In the pre-market, futures were down just 1.5 percent versus the five percent limit down from the previous night. By the time U.S. stocks opened for business, they quickly rallied back to flat and proceeded to close up 1.5 percent on the day. When the week ended it was the best week for stocks in the past five years. The three major stock market indices went on to post three new highs for the year.

On November 29 the OPEC members agreed to a 1.2 million barrel per day oil production cut in a resolve to boost prices. Although it was a widely anticipated event, doubts of a significant agreement had been gathering in the days and weeks leading up to the meeting. Oil prices rose 9.5 percent on the announcement to nearly $50 per barrel, and the energy sector as a whole rose significantly.

There are a few key points to take away from these experiences. Remember that it’s “time in the market” versus “timing the market” which makes all the difference. You should always be invested (at the right risk level) and especially during strong markets that are sometimes unexpected. We are true believers that your political views should not influence your investment plan; this rang true in November. Politics are personal and based on your beliefs and values, while your investments need to be rooted in market fundamentals.

The S&P 500 had a very strong month, up 3.70 percent to close at 2198.81. Likewise, the Dow Jones Industrial Average and the Russel 2000 reached new records in November. The stock market was led by financials and energy. International stocks did not fare as well as future U.S. trade policies are a bit uncertain. Emerging markets posted a 4.60 percent drop while developed international stocks declined 1.99 percent in November. Corporate earnings season is in full swing and the results have shown a much-awaited turnaround, albeit small. Earnings are beginning to grow again!

In December we will focus on analyzing what went well this year and what we can look to enhance as we enter 2017 under a new administration. Despite all the noise and headlines, we expect 2017 to be a good year for stocks as strong consumers and growing corporate profits could drive prices higher. The fundamental key will be corporate profits. If the earnings growth estimates in the graph below become reality this will likely support the stock market throughout 2017.

The bond market is entering a new phase, rates have risen in the past few weeks and in the short term have hurt bond prices. Janet Yellen’s term will expire in February 2018, and the Fed could become more hawkish under new leadership. For now, we believe a 25 basis point hike in interest rates during the mid-December Federal Reserve meeting is a done deal.

Looking ahead, we expect the Fed Funds rate to settle in the 1.00 to 1.50 percent range by the end of 2017. Rates will remain low by historical standards, but the 10-year U.S. Treasury Note may produce yields north of 2.50 percent next year versus the 1.75 percent experienced this year.

Voters chose a new political course. You chose your investment course. Our best advice is: “Don’t let the political changes change your investment program.” We are pleased with the portfolio results thus far in 2016. Stay committed and maintain a diversified portfolio designed with your risk tolerance in mind. Time will bring you to your financial destination if you let it work for you.

To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222

Since the election, interest rates have climbed both here and abroad.

Actually, the rise began overseas prior to the election. Negative interest rates offered on the bonds of some foreign governments have not stimulated economic growth as hoped. Then came the U.S. elections and expectations for increased inflation are driving up yields on both U.S. government and corporate bonds. This is prior to any changes by the Federal Reserve.

After years of low inflation and fears of deflation in the U.S., the reversal in outlooks has been quick and substantial. Trump’s campaign promises centered around increased government spending for infrastructure projects with its inherent upside pressure on prices of materials and wages. The newly-elected president has also promised to reduce tax rates, including the repatriation of corporate cash from overseas at a modest 10% tax rate.

This plan would increase government spending and lower government tax revenues. Budget deficits and the absolute level of public debt would likely rise, but we don’t know to what extent. Remember it is still a plan, and election promises are easier said than done. Both the U.S. House of Representatives and the Senate will have to debate the merits, create a compromise resolution, and put it to votes before the president could grant approval of his vision. Even though some believe that a Republican-dominated Congress will ensure quick and decisive action, we must recall that the campaigns proved that not all Republicans view progress in the same way. The point is we are likely moving away from a US economy assisted by monetary (Federal Reserve) policy toward an economy facilitated by pro-growth fiscal (Congressional/Presidential) policy.

Stock prices rose on the election results in expectations of increased economic growth. This moved stock dividend yields down, as fixed income interest rates rose. The result is a crossover in S&P 500 stock dividend yields vs. Treasury yields as shown in the one year chart below:

Does the crossover of rates indicate that investors should rotate from stocks to bonds? We don’t think so. We believe that stocks can continue to appreciate as corporate revenues and profits grow. There is likely to be an added boost to stock prices if corporations are given a tax holiday to repatriate cash from overseas and use it to buy back shares or declare special dividends.

Meanwhile, in a rising rate environment an investor who keeps bond holdings in short-term maturities has the opportunity to rotate into higher yielding bonds as holdings mature. Rates do not rise in a straight line, so opportunities should arise from time to time.

Remember that you’ve chosen a strategy that is right for your level of risk and return. Do not alter your strategy based on political events or short term swings in the markets. Keep your emotions away from your portfolio, stay patient and invest for the long haul.

To expand on these Market Reflections or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222

November has started out to be quite the month. So far:

• The market has been down 7 days in a row, something that’s happened only 4 times the last 20 years
• Oil has fallen from a high of $52 to $45 a barrel as an OPEC production cut seems less likely
• The Presidential campaigns continue to take bizarre turns with both parties
• And the Cubs won the World Series for the first time since 1908

The bottom line is the S&P 500 has been consolidating since its highs in August. As of today it’s down about 4% off these highs, and it wouldn’t surprise us to see the market correct a bit more. Investors have been unwilling to push stocks higher as they await:

• The conclusion of 3rd quarter corporate earnings
• Oil price stabilization
• The conclusion of the Presidential and Congressional elections

Let’s focus on the elections and how they could potentially affect the markets. Right now, the polls still favor Clinton winning the presidency, but the margin of victory being predicted has narrowed quite dramatically after the FBI decided to reopen the Clinton email investigation. Current consensus thinking for now believes:

The market will take a Clinton victory in stride since she’s a known political entity and begin to focus on the fundamentals again, which are getting better. The market likes continuity and investors could expect a relief rally if she wins.

A Trump victory would bring an element of uncertainty into the markets; investors just aren’t sure what he would bring to the political arena. This uncertainty would most likely lead to a market correction that, in our opinion, would be short lived.

Conventional thinking is that Republicans are better for the markets, but historically markets have performed better under Democratic presidents. Analysts at S&P Capital IQ have found that since 1945 the average annual gain under the Democrats was 9.7%, while under the Republicans it was 6.7%.

The most important question to ask is, “Do election results drive these returns or do the trajectories of the economies and markets already in place drive returns?” Our belief is that politicians tend to INHERIT versus INFLUENCE the stock markets. Proof in point: The poor returns of the Richard Nixon and George Bush eras had more to do with the Arab oil embargo and financial crisis respectively than Republican initiatives. Likewise, the excellent returns of the Barack Obama era most likely were due to the fact he came into office right after the severe market correction of 2008, rather than his party’s initiatives.

This doesn’t mean we shouldn’t be conscious of which party holds office. Certain political initiatives of either a Democratic or Republican administration can weigh on (or favor) certain sectors within the markets. A Clinton administration would weigh on the drug/biotech manufacturers (continued attack on high drug prices) and financial stocks (continued regulation), while it could be favorable for the alternative energy sectors. A Trump win would likely favor the financial, healthcare and defense sectors and be detrimental to the manufacturing sector.

Regardless of who wins, most political strategists predict we’ll still have a Republican House and a Democratic Senate. The checks and balances that a split Congress brings to the table is a constructive setting for stock markets.

Our view is that once the elections are over the market will once again begin to assess the fundamentals. We think these fundamentals are encouraging as we look at an economy that continues to expand, earnings growth that is inflecting from negative to positive and valuations that are not cheap, but reasonable. Finally, we encourage investors to avoid mixing their political feelings and their portfolio decisions; we’ve seen too many negative outcomes when investors mix the two.

To expand on these Market Reflections or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222