Investors have been on a roller coaster ride in the wake of Donald Trump's victory for president this week. U.S. stocks shrugged off the initial knee-jerk election-night reaction that saw U.S. equity markets touch their 5% down limit before rocketing higher, with the Dow Jones Industrial Average surging to a new record high on Thursday.
"It's been an amazing couple of days in how the markets reacted. We haven't seen the S&P 500 and Treasury yields rising the way they have in a long time," said with JJ Kinahan, Chief Strategist, TD Ameritrade.
As investors look for clarity on what a Trump administration could mean for the economy and financial markets, Kinahan offered perspective in a special Market Update webcast along with Craig Laffman, Director, Fixed Income Trading and Syndicate, TD Ameritrade.
Here are five key insights investors can consider now.
1. Higher Treasury Yields
Not only have stocks registered significant price swings this week, but the U.S. Treasury market has signaled a significant move higher in yields.
The yield on the 10-year Treasury note has surged from a low at 1.77% on Nov. 4 into the Nov. 10 high above 2.00%.
"This is an astronomical move in this short turnaround time," Laffman says.
President-elect Trump has proposed massive infrastructure spending to fix the country's bridges and roads and could also create new jobs, along with a tax cut proposal. The increased spending and tax cuts could boost economic growth and inflation, which may start to rev up at a faster pace than previously expected.
"The marketplace believes that fiscal policy will move interest rates up as opposed to monetary policy," Laffman explains. In terms of moving the needle on interest rates, "The election of Trump seems to have accomplished what the Fed did not accomplish last December," Laffman says.
Looking ahead, the trend toward higher interest rates may be here to stay. "This has been a dramatic move in the marketplace. There is certainly the possibility of an initial over-reaction and we might retrace a bit. But, at least for now, the trend in yields is higher. By how much, we don't know," Laffman says.
2. Fed Interest Rate Hikes
The election of Mr. Trump to the White House has the potential to speed up the rate at which the Federal Reserve has been hiking rates, if growth and inflation begin to heat up. The recent "one and done" type of move that we have seen by the Federal Reserve with the interest rate hike in December 2015 is unusual by historical perspective. A more historically "normal" interest rate hike cycle tends to unfold at the pace of four to six in one year.
"One and done is not the desired frequency for the Fed," Laffman says. "It minimizes the actual return on that interest rate hike. While you may see an immediate increase on certain rates inside the economy, in some cases it takes months or even up to a year for that to flow through the entire economy."
3. Financials and Industrials
Many investors are wondering what sectors could be impacted from a Trump administration. The early indications are that financials could be a beneficiary, Kinahan says. There have been reports that the Trump transition team is looking to dismantle the Dodd-Frank regulations that passed after the last financial crisis. "Some of the deregulation might be viewed as positive," Kinahan says.
Another sector that could be poised to benefit under the new president are the industrials, which were a top performer on Thursday. Within that sector there are a lot of "defense stocks that could benefit even if he keeps just some of his campaign promises," Kinahan says.
4. Use Stocks As A Proxy
One of the issues that has emerged during the presidential campaign was the issue of trade. "A lot of investors ask me how do I invest in China," Kinahan says.
Here's one out of the box way traders can think about expressing a "China view." Example: there are a number of U.S.-based companies that sell a large portion of their finished products to China. Traders looking to express a specific China view could consider trading a U.S. stock that has a significant amount of revenues stemming from China. How to find? TD Ameritrade clients can use the Company Profile tool within the thinkorswim platform to dig into the specifics of U.S. based companies and identify where their revenue streams emanate.
In a similar vein, do you want to trade expensive technology stocks but have a limited trading budget? Look at related companies. Who are the key suppliers? What companies create the components that go into the finished product? Playing detective can rustle up clues on how to trade with the trend an expensive technology company stock with a cheaper related stock.
5. Market Vulnerable To Retracement
As investors move forward, be aware that the S&P 500 could be vulnerable to a retracement, Kinahan says. He pointed to the overnight low hit on Nov. 9 in the December S&P 500 future at 2028.50.
"We have a history of retracing these night-time moves during day sessions. For the next couple of weeks I think we have to be nervous that we could retrace that level. Please be on guard," Kinahan says.
Lastly, Kinahan noted that many investors talked about missing opportunity because they’re not in the market. "Take a look at the Essential Portfolios”, (a managed portfolio offering from Amerivest Investment Management, LLC, TD Ameritrade’s Registered Investment Advisor affiliate). “Read about it, it is a cool offering... I think it could be of interest to many of you who want to be invested in the market, but don’t have the time to actively manage your portfolio. This product automatically monitors and rebalances, so you don’t have to," Kinahan concludes.
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