Last Tuesday, many Americans watched in great surprise as Donald Trump won our presidential election. Just that day, the New York Times had placed Hillary Clinton's odds of winning at 85%,[1] based on a range of state and national polls. But, like the Brexit vote this past June, 2016 seems to be the year of unexpected outcomes. 

As predicted, the markets initially reacted to uncertainty as they often do: with losses. Futures for the Dow, NASDAQ, and S&P 500 all dropped at least 4% in the middle of the night after Trump's win.[2] But come Wednesday morning, everyone was in for another surprise. 

Despite many predictions that the markets would sell-off if Trump won, all of the major U.S. indexes ended the week ahead. The S&P 500 was up 3.80%, the Dow gained 5.36%, NASDAQ increased 3.78%, and MSCI EAFE added 0.05%.[3] The Dow even closed at an all-time high on Thursday and posted its best week since 2011, despite being slightly down on Friday.[4] 

Needless to say, these two developments last week gave significant surprises for most people. Let's look a bit deeper at the market's reaction and what may lie ahead. 

Understanding the Rally

The markets hate uncertainty, but they love economic growth. After Trump's win, investors saw potential for decreased corporate tax rates, individual income taxes, and government regulation, plus increased infrastructure spending. All of these changes could help drive economic growth. 

When you look at which sectors outperformed, you can see who investors believe may benefit from a Trump presidency: 

  • Biotech jumped nearly 16% on expectations that Trump may not fight price increases as Clinton would have.
  • Financials increased 11.33%, because increasing interest rates, deregulation, and infrastructure projects would serve them well.
  • Industrials were up 7.96%, which would benefit from infrastructure projects.[5] 

Seeing Beyond Stocks

While the major markets posted impressive gains, gold had its worst week in three years, losing roughly 6.2%.[6] 

But why? 

A multitude of reasons come into play, but one stands out most clearly: If Trump is able to hold to his promise of $1 trillion in infrastructure spending, inflation will likely pick up and the Federal Reserve could significantly increase interest rates during that time. As a result, gold's appeal would lessen as other investments offer a more attractive income yield.[7] 

Analyzing What's Ahead

Right now, the election is fresh on everyone's minds and directly affecting the markets. But like all major events, another one will eventually capture our attention. As we stand now, the fundamentals tell us that the economy is performing well. Unemployment is at only 4.9%,[8] hourly earnings are rising,[9] and GDP is growing.[10] Thus, there is a good chance that the next big event on the financial horizon is a Federal Reserve interest rate increase in December. 

If the Fed does choose to increase rates, we may see additional volatility in the short-run-but the underlying data shows us that the economy is fundamentally strong. 

Looking to the Long-Term

Seeing last week's market performance might make you want to find even more ways to capture growth. Remember, just as in down cycles, emotion has no place in investing. We are here to help guide you through these tumultuous times and keep a tireless focus on achieving your long-term goals. 

The markets and our political environment may be full of surprises, but our goal is to make your financial life as peaceful and comfortable as possible.

ECONOMIC CALENDAR:

  • Tuesday: Retail Sales
  • Wednesday: Industrial Production
  • Thursday: Consumer Price Index, Housing Starts
  • Friday: Leading Indicators

 

 

 

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International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.

 

The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.

The Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of stocks of technology companies and growth companies.

The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indices from Europe, Australia and Southeast Asia.

The S&P U.S. Investment Grade Corporate Bond Index contains U.S.- and foreign-issued investment-grade corporate bonds denominated in U.S. dollars.

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The S&P/Case-Shiller Home Price Indices are the leading measures of U.S. residential real estate prices, tracking changes in the value of residential real estate. The index is made up of measures of real estate prices in 20 cities and weighted to produce the index.

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Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

Inflation is the rise in the prices of goods and services, as happens when spending increases relative to the supply of goods on the market.  Moderate inflation is a common result of economic growth.  Hyperinflation, with prices rising at 100% a year or more, causes people to lose confidence in the currency and put their assets in hard assets like real estate or gold, which usually retain their value in inflationary times.

Gross Domestic Product (GDP) is a measure of output from U.S. factories and related consumption in the U.S.  It does not include products made by U.S. companies in foreign markets.

The Federal Reserve System (also known as the Federal Reserve and, informally, as the Fed) is the central banking system of the United States. The Federal Reserve System is composed of 12 regional Reserve banks which supervise state member banks. The Federal Reserve System controls the Federal Funds Rate (aka Fed Funds Rate), an important benchmark in financial markets used to influence the supply of money in the U.S. economy.

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Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.

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[1] http://www.nytimes.com/interactive/2016/upshot/presidential-polls-forecast.html

[2] http://www.marketwatch.com/story/dow-futures-plunge-450-points-on-election-turmoil-2016-11-08

[3] http://finance.yahoo.com/quote/%5EGSPC/history?period1=1478232000&period2=1478840400&interval=1d&filter=history&frequency=1d

http://finance.yahoo.com/quote/%5EDJI/history?period1=1478232000&period2=1478840400&interval=1d&filter=history&frequency=1d

http://finance.yahoo.com/quote/%5EIXIC/history?period1=1478232000&period2=1478840400&interval=1d&filter=history&frequency=1d

 https://www.msci.com/end-of-day-data-search

[4] http://www.cnbc.com/2016/11/11/us-markets.html

[5] http://www.cnbc.com/2016/11/11/us-markets.html

http://time.com/money/4567957/stock-market-trump-winners-losers/

[6] http://www.marketwatch.com/story/gold-prices-head-for-nearly-4-weekly-loss-2016-11-11

[7] http://www.theweek.co.uk/gold-price/61682/gold-price-drops-back-after-trump-victory-surge

[8] http://www.ftportfolios.com/Commentary/EconomicResearch/2016/11/4/nonfarm-payrolls-increased-161,000-in-october

[9] http://www.ftportfolios.com/Commentary/EconomicResearch/2016/11/4/nonfarm-payrolls-increased-161,000-in-october

 [10] http://www.marketwatch.com/story/gdp-hits-29-in-biggest-gain-since-mid-2014-2016-10-28