Wednesday, 9 November 2016

Trump Victory and the Stock Market Roller Coaster Ride

What a 24 hour in U.S. politics and markets. The wild swings could make anyone's head spin.

 Lies, Damn Lies, and Polls 

Just before start of the voting begun, I watched CNBC showing not one, but some 7 polls all indicating good odds of Clinton's win over Trumps. While i was still wary how the poll got it wrong in Brexit, but surely the American pollsters would learn the lessons, and furthermore, i thought that this is not one poll, but 7 polls. They have to all get it wrong for Trump to win.

President Trump delivered his victory speech
President Trump delivered his victory speech

As the vote count progressed and the numbers came out that seems to suggest that the data wasn't favoring Clinton, the after market stock index futures started to do a waterfall drop. At its bottom, DJIA futures cratered more than 800 points, which is the largest one-day point drop EVER.

Pre-market S&P500 Futures on 9 Nov 2016
Pre-market S&P500 Futures on 9 Nov 2016

This seems logical because the headline grabbing "the longest 9-day losing streak since the 1980s" was caused by favoring polls swing towards Trump. So if an increase in Trump's winning odds can cause this 9-day drop (even though it's only a few percentages), imagine an actual Trump victory. So the futures market reasoned.

At this point, i expected a minimum of 5% to 8% loss in my portfolio when the market opened on 9 November.

The market opened green, briefly. Let's say it's flat. At least it's not anywhere near as bad as i feared. In fact, all the major indexes closed up more than 1% for the day. From losing 800 points in the futures market before open to the 250 points up in the close, the DJIA had moved more than 1250 points in the day ! Pretty crazy stuff.

Both the pollsters, and the futures market got it utterly, ridiculously wrong.

Were they really wrong? Well, not really. Not the markets, just the polls.

To explain the seemingly market wild swings in the markets a week leading to the election result, let's look at 3 possible election outcomes.

1.  Clinton's win with a divided House.
2.  Trump's win with a divided House.
3.  Trump's win with a Republican control of the House.

The markets expected outcome 1 as the most likely occurrence until the FBI's revelation of Clinton's email scandal on Oct 31, this led to an increasing likelihood of outcome 2, which the market responded with a 3 days drop below important technical support of 2130 in S&P500. When the news of Clinton was off the hook on the weekend on Nov 5, the markets breathed a collective sigh of relief and responded with a relief rally.

Clearly, markets don't like outcome 2. And on the election night, when the voting came in and outcome 2 seemed to rear its ugly head once again, the market futures indexes plummeted because last week's outcome 2 is only a probability while on election night, this was a reality. But then as the results were being digested and it was gradually understood that it was turned to be outcome 3, the market futures indexes gradually moved up, and eventually closed positive. The markets obviously like outcome 3 more than outcome 1. This makes sense because outcome 1 is similar to outcome 2 except with the uncertainty of Trump. But outcome 3 means Trump can carry some fiscal polices, which outcome 1 wouldn't. Investors by then warmed up to the idea that Trump would be the next Reagan. Of course, this should be bullish for markets. At least, that's the views of the markets.

 Gold, Stock and Bond Markets 

As the stock index futures plummeted around 10pm, gold spiked as high as 1340, but fell back to 1275. This is lower than its previous close as the equity and bond continued to rise. While this seems bad, considering that the 10-Year Treasury Note ($TNX) did its crazy thing like the rest of other markets and gapped up and closed above 2.06%, a level that similar to the start of year just after the Fed interest hike.

10 year treasury notes 2016

If we're still in the 1st half of the year, a 2% yield in TNX would cause gold price to tank. But we're facing a different situation in the 2nd half of the year comparing to the 1st half. After July, we're looking forward to an inflationary theme where we expecting a steepening yield curve, which is also good for gold price. In the 1st half of the year, on the other hand, we were dealing with a more deflationary - or some would call it 'dis-inflationary' - environment. Perhaps, i'm too early to make that call.

While this yield steepening or the rising of TNX have begun for several months, it went nuts yesterday. One of the factors for the reason for the inflation expectation is the improving economies both in USA and some emergent economies like Brazil. Chinese economy seems to stabilize. Secondly, in Trump's victory speech, he mentioned the infrastructure rebuilding, which should unleash inflation. At the very least, inflation expectation, which is also supportive of gold prices.

 Reshuffling the Deck 

I approached today's market open with the view that my portfolio was going to suffer considerable downside. Less than half an hour after market open, my portfolio was up 7%.

As gold stocks make up some 20% of my portfolio, the rise in gold price, at least in the early session of the market, gave my portfolio a boost. My other stocks that included CLF and BAC also jumped for joy.

The Trump's promised infrastructure spending should inject life into CLF. This stock gapped up and closed at almost 4.7% higher. All bank stocks were also up and my BAC closed up 5.71%.

I was lucky, the only stock in my portfolio that was down is Apple (AAPL), but by only 0.16%.

The big market drop after Trump victory that some expected didn't materialize. What happened yesterday was that institutional investors were jockeying for positions, or re-positioning their portfolios to gear towards Trump presidency. The 2 hot sectors that i mentioned are materials, especially steel, and banking.

Big pharma, which was in the cross-hair of Clinton, to be targeted for price regulations, have been badly oversold, are now roaring back. But hospital sector stocks plunged some 20% because of the speculation that ObamaCare would be dismantled.

As there're winners and losers, with seemingly more winners, the market ended up some 1+% higher.

At this point, all these Trump's fiscal policies of huge infrastructure spending, reduce bank regulation, tax reductions are all being quite swiftly being priced into the market. How much of these policies would or could be implemented remained to be seen. But this is November, and the election is over. These 2 things alone were enough to drive the market higher. The Trumponomics couldn't hurt.

 November Starts Today 

Typically September, and October are the 2 worse months of the year for equity markets, and from November onward to the rest of the year should be strong months. Many pointed to the 9-day losing streak that occurred this November month and saying it's a bad omen.

Well, this time isn't different. November is a good month for market. It has just been delayed for 3 days as the market bottomed in 4 November (instead of October). This is because institutional investors have been sitting on the sideline, waiting for the election to end. Not knowing who's the next president means not knowing how to do the appropriate asset allocations / portfolio re-adjustments / sector rotations, which took place in a frenzy-feeding pace yesterday.

Now that the election is over, and the fog of uncertainty is cleared up, the market can now return to its usual seasonality. I.e. strong stock market in the months ahead. Of course, there will still be more of such portfolio re-position in the future as more of Trump's policy are being unfolded over time.

S&P 500 price chart on the day of Trump victory
Break out, Brexit and Trump victory

 Brexit Mark II 

Considered how much uncertainty and fears we faced before the election, the market held up very well, which clearly indicates a very resilient market. Remember that headline grabbing 9-day drop, it was erased in the following 2 days. This parallels to Brexit. And Trump presidency is the US' Brexit. And if the major stock market indexes roared back to new high after Brexit, i expect we will see a repeat here. In both cases, it took only 3 days to erase all the losses afterwards. Finally, in both cases, the market drop below important supports, creating traps for bears who think the markets are diving from there. In this kind of whipsawed bull market, bear traps are everywhere.

The market rally since the 2nd half of the year has been accompanied by banks, which did not occur in the 1st half of the year. The small cap index Russell 2000 is the strongest of index. These 2 factors imply a more sustainable bull market rally than any time during this year.

Now that it broke out of the down trend that started from 6 September (see above chart), i expect S&P 500 to reach 2200 in no time (probably before the end of this month).

All these, and he isn't even moving into the White House for a couple of months. But then history shows that this kind of euphoria is quite typical for a new president in the White House. I'm very keen to see how the market plays out when Trump actually swears into the office in January.

We really don't know how his policies are going to play out. For now, just enjoy the ride while it lasts.

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