Experience taught me a few things. One is to listen to your gut, no matter how good something sounds on paper. The second is that you’re generally better off sticking with what you know. And the third is that sometimes your best investments are the ones you don’t make. – Donald Trump
The S&P 500 Index snapped its 9-day losing streak last Monday and never looked back, gaining 3.8% for the week as Republican Donald Trump won the presidential election in a stunning upset. The Dow Jones Industrial Average, after the futures were down some 800 points the night of the election on fears of a Trump win, reversed course and actually closed higher on Wednesday. For the week, the Dow even outperformed the S&P 500 with a gain of 5.4%, posting its best week since 2011 and closing at a record high. Conventional wisdom thought that a Trump presidency would lead to a sizable stock market correction, but a gracious and conciliatory speech by Donald Trump helped reassure nervous investors that his policies might be implemented gradually or even compromised. The fact that Republicans also retained control of both the House of Representatives and the Senate also helped ease investor anxiety as there is renewed optimism that many of Trump’s pro-growth policies will most likely be passed. In addition to faster economic growth, a Trump presidency could also mean comprehensive tax reform at the individual and corporate levels, the possibility of higher infrastructure spending and less government regulation, especially in the financial sector. However, with stronger growth could come higher inflation and higher interest rates. The yield on the 10-year Treasury Note rose to 2.12% on Friday after starting the week at 1.78%, the first time that its yield has eclipsed 2% since January. Yields on long-term Treasuries jumped even more as the 30-year Treasury Bond ended the week at 2.94%. As a result, it is almost certain that the Federal Reserve will raise interest rates at their December meeting as the odds of a rate hike have risen to over 80%. The dollar also rose last week and could be problematic for multi-national companies doing business overseas while the price of gold plunged as investors dumped the precious metal on fears that interest rates are headed higher. Sectors of the market that did well included health care stocks, industrial and cyclical stocks and financial stocks while utilities, real estate securities and consumer staples lagged the overall market. The stock market will likely continue to be volatile as investors come to grips with the new administration and what it means for their investment portfolios.
It was a quiet week for economic data and corporate earnings reports as the U.S. presidential election stole the show. Weekly jobless claims fell 11,000 to 254,000, a one-month low and better than had been expected as the labor market continues to be strong. The November consumer sentiment index came in at its highest level since June as the economic outlook has brightened with the recent report on third quarter gross domestic product (GDP) and other favorable data.
For the week, the Dow Jones Industrial Average soared 5.4% to close at 18,847 while the S&P 500 Index jumped 3.8% to close at 2,164. The Nasdaq Composite Index also rose 3.8% to close at 5,237.
Investors will get a better read on inflation this week as data for the October producer price index (PPI), consumer price index (CPI) and import prices will all be released. The data is expected to show a modest increase in inflation over previous levels. October retail sales are forecast to increase 0.6%, the same as in September and evidence that consumer spending remains healthy. October housing starts are also expected to remain strong while industrial production should top last month’s number. Finally, leading economic indicators for October are forecast to edge modestly higher but be less than what was reported in September.
Retailers will dominate the corporate earnings releases this week with Wal-Mart Stores, Target, Home Depot, Lowe’s, Best Buy, Staples, TJX Companies, Dick’s Sporting Goods and Williams-Sonoma all scheduled to report. Other notable companies on the agenda include Cisco Systems, Applied Materials and Advance Auto Parts.
One of the casualties of the increase in interest rates has been real estate investment trusts or REITs, which have declined about 15% after peaking in July when the yield on the 10-year Treasury fell to 1.36%. At the time, the prospect of REITs being reclassified into their own sector within the S&P 500, instead of being included in the financial sector, brought renewed interest in the asset class. Since then, though, interest rates have risen steadily, adversely affecting prices of so-called bond proxies such as REITs, utilities and telecom stocks which are sensitive to interest rates. The Vanguard REIT ETF (VNQ), which is the largest REIT ETF with over $30 billion in assets, has seen its price fall 15.3% since reaching a high of $92.70 in July. This REIT ETF invests in stocks that are issued by real estate investment trusts, or companies that buy properties such as office buildings, hotels, shopping centers, apartment buildings and storage facilities. With the pullback in REITs, valuations are now attractive as fundamentals remain solid and balance sheets are as strong as they have ever been. The Vanguard REIT ETF also currently yields 4.3%, which is more than double the yield on the S&P 500 Index. Despite this recent weakness, REITs should be part of any diversified portfolio as they tend to behave differently than equities, reduce the overall risk of a portfolio and provide an above-average dividend yield for income-oriented investors.