By David Nelson, CFA
In a New York Minute
Everything can change – Don Henley
Don Henley’s lyrics from his popular hit song New York Minute sum up a volatile week that pushed some trades back in the green while others were thrown out in the trash.
Donald Trump’s victory election night stunned the world leaving pollsters and talking heads speechless. The New York Times gave a Democratic win an 86% probability while the Huffington Post put the odds at 98%. It’s safe to say many investors were positioned for a different outcome.
While the public often takes their time to adjust to the new landscape, today’s computer driven markets can react violently accomplishing in hours what used to be days and weeks of trading. One look at a 30 minute S&P 500 futures chart shows just how chaotic the price action was as the election results came in late Tuesday evening.
Coming into the election stocks were already pricing in a Democratic victory. Monday’s price action said it all as investors reacted to news that FBI Director Comey said the recent discovery of new emails didn’t change the original the view from Justice.
However as the results came in on election night Dow Futures fell nearly 900 points when it became apparent that Mr. Trump was about to become the President Elect. By the time the market opened some sense of calm had returned and as we headed toward the close the S&P 500 (SPY) was up over 1%.
While the Dow and the broad indices moved higher the real story was the mass rotation taking place underneath the surface.
After a rough start Energy was the leading sector coming into the month. Healthcare had fallen to last place fearing a Clinton victory. All of that changed post the election surprise.
The chart above of November’s performance explodes following the election as the (XLF) led by banks pushed higher followed by Industrials (XLI) and Healthcare (XLV). In dead last were safe haven interest rate sensitive stocks like Utilities (XLU). In a New York minute some investment strategies were turned upside down.
Perhaps even more violent than stocks was the action in the bond pits. Ten year rates, after a brief drop rocketed higher Wednesday and continued on into Thursday. We’ve now taken out the near term resistance and a downtrend line going all the way back to 2013. This has been building for months as the banking sector was moving higher long before Election Day as a steeper yield curve would help Net Interest Margins and the bottom line.
Expect a lot of noise this week as President Elect Trump makes his cabinet appointments and markets continue to adjust to the new calculus in Washington. It’s important to remember and needs repeating but the election process gives us a President not a King or Queen. Expect some reversion to the mean and sudden price swings reacting to headlines during the days and weeks ahead as investors navigate the new world.
