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Potential Trump Cabinet Picks, Economic Data, Could Keep Market Humming

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November 14, 2016

(Monday Pre-Market) It’s a new week, but that doesn’t necessarily mean the excitement is over.

Last week was historic, with the surprise election of Donald Trump and the quick reversal in stocks from limit down in overnight trading Tuesday to explosive rallies in stocks and Treasury yields Wednesday and Thursday. We’re probably not going to see such huge swings in the coming week, but intraday volatility could remain a factor, particularly as word starts to filter out from Washington around potential cabinet picks. Who’s going to run the Treasury? How about trade relations? Be ready for possible market reactions as these names get announced in the near future.

In addition to continued buzz around the election, a number of economic reports might keep investors on their toes, including retail sales on Tuesday, the producer price index (PPI) on Wednesday, the consumer price index (CPI) on Thursday, and leading indicators on Friday. Leading indicators, in particular, could give a better sense of how the economy might look going forward.

With economic growth projections rising and a December Fed rate hike increasingly baked in by the futures market, yields on Treasury bonds continued their strength Friday even as stocks took a breather early in the day. Yields on the benchmark 10-year Treasury note traded at around 2.14% as of midday Friday, the highest since January, and up an astonishing 40 basis points or more from earlier in the week. When the election results became clear, some economists began raising their growth projections (see below), implying that rates could go higher and that perhaps the economy might be strong enough to handle higher rates. And chances of a Fed rate hike reached 85% by Friday, according to CME Group futures.

With all the news pouring in, volatility, as measured by VIX, remained fairly low, falling back below $15 during parts of the day Friday after rising above $20 right before the election. But keep in mind the possibility of intraday volatility this coming week. Remember, volatility can mean opportunity, if managed correctly. In the meantime, investors don’t have to be “all in” or “all out” of the market. They can segue in and out.

It’s an exciting time in the markets, for sure. It’s also a good time to check those portfolios and make sure they reflect the sectors that might do well. An investor whose portfolio doesn’t reflect that they believe could be making a big mistake, so spend more time on portfolio planning than on vacation planning!

S&P 500

FIGURE 1: COULD NEW HIGHS BE AHEAD?

The S&P 500 (SPX), plotted through midday Friday on the TD Ameritrade thinkorswim® platform, took a breather early Friday, but still remains not far below the all-time high of just over 2193. In recent months, the 2190 mark has been strong resistance, so we’ll see if that holds. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Pole Position: It’s often said that a good rally starts with financials, and that was definitely the case last week as the financial sector rose more than 10% in five days while the overall market cruised up to near record highs for the SPX. Financial’s upward run is related partly to soaring yields, and to a sense that under a new presidential administration, parts of the Dodd-Frank financial laws could be dismantled. Whereas in recent months most of the hopes for rising interest rates seemed to be placed on the monetary side, there’s now a growing sense that fiscal stimulus may be possible as well, which conceivably could put even more wind at the back of the banks. Defense was another high-performing group last week. If Trump is even able to keep some of his military spending promises, it could continue to help the defense sector

Bringing Up the Rear: Utilities were up slightly as of midday Friday, but still down more than 4% on the week, by far the worst performance of any sector in what was a mainly positive five days. Utilities remain up 9% year to date, but the question is whether this week’s drop could be a sign of things to come. The slide in utilities coincided with a steep rise in Treasury yields, reflecting in part hopes for better economic growth. And the Fed is widely expected to raise rates next month, according to the futures market. If rates keep rising, that could eventually make bonds a bit more attractive for investors seeking yield. Utility stocks have benefitted this year in part because many boast high yields, but falling bond prices could bring more competition from fixed income.

Growth Projections Rising: In the wake of the Trump victory, some economists began raising estimates for Gross Domestic Product (GDP) growth from where they had been at 2% to 2.5% up to the 3.5% to 4% level, partly in hopes that a Trump stimulus, such as the infrastructure programs he’s discussed, could help spark the economy. By comparison, the most recent government estimate for Q3 growth is 2.9%. The Atlanta Fed recently projected Q4 growth at 3.1%.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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