In a surprise election victory, Donald Trump recently became the president elect of the United States. Perhaps even more surprising was the dramatic overnight reversal of over 5% in the stock indices as the final poll numbers came in. Many esteemed market experts thought the market would tank at least 10% if Trump won the election and if not for the new market liquidity rules, they might have been right—at least for a few hours. The markets often surprise the most experienced and knowledgeable investors with extreme moves that were not predictable in advance. Whenever there is a market surprise that is against the consensus opinion there will be large reversals in existing trends which produces winners and losers. The impact of the presidential election in this case is even more pronounced given that the Republicans also control the house which makes it easier for Trump to pass legislation. Many of the market moves reflected a general stance towards greater protectionism, more hawkish influence on monetary policy, and a brand new wave of supportive fiscal policy. Below is a breakdown of the major asset class performance post election:
We can see that only domestic equities have risen since the election- reflecting anticipated lower tax rates, greater fiscal support, and protection from foreign competition. In contrast, emerging markets were the biggest loser since they were the direct beneficiary of looser trade policies. Treasurys fell significantly reflecting pre-election promises by Trump to restore a more normal level of interest rates, and also banter about the possibility of allowing the government to default on Treasurys. Some of the more extreme winners and losers can be seen by looking at the breakdown of sector performance:
Financials were by far the biggest winner posting outsized gains on the back of anticipated higher interest rates which benefit their business. In contrast, interest-sensitive Utilities were the biggest loser. Industrials posted large gains reflecting an expected boost to manufacturing, while Health Care bounced back from expected shakeups in regulations under the Clinton regime. Technology – the market darling pre election – did poorly reflecting concerns regarding their outsourced overseas manufacturing being more vulnerable to greater scrutiny. Looking at factor performance we also see some interesting trends:
By factors we are referring to a portfolio that goes long stocks that have high exposure to the underlying factor and short stocks that have low or inverse exposure to the underlying factor (i.e. Size would be going long small stocks and short large stocks). Value stocks were the big winners after struggling through the last couple years. The Size factor also performed well. Undervalued and smaller domestic companies tend to be cheaper when people anticipate that the economy is struggling and capital expenditures are dwindling. These types of firms also tend to be also more volatile than the average stock. Under the new regime, fiscal policy and protectionism should give these generally smaller and more economically vulnerable companies a big shot of adrenaline. In contrast, Low Volatility/Low Beta did poorly which reflects a capital shift away from the larger and higher quality companies (many are in the Consumer Staples sector) or those that are interest sensitive like utilities. Momentum was also a big loser, which is to be expected since the market trends reflect trends in the market consensus while surprise moves by definition are against the consensus. But momentum can do very well once a new consensus becomes established since it is agnostic to what companies, asset class, and factor exposures it tends to hold.
Whether these new trends in asset class, sector and factor performance are enduring is anyone’s guess. One thing is for sure is that this election victory and the market moves that followed will certainly go down in history for Trump the “November Man.” Ultimately the market will be looking for follow through or evidence that the president will make good on his original promises. As these trends become more established, we would expect to be positioned in our portfolios towards these new winners. Either way we wish the new president elect lots of luck and hope that any changes in policy will be beneficial to the country in the long run.
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