Monthly Outlook: December 2016
Wow, what an election. It’s been three weeks already since the election and the world is still abuzz trying to figure out what it all means. The knee‐jerk reaction in markets so far has been to boost Financials, Energy, and Industrial stocks because investors are guessing that Trump will de‐regulate banks, allow more drilling, and initiate massive infrastructure projects. On the other hand, Healthcare, Staples, and Utilities are decidedly down. All in all, the S&P500 is up just 2.75% since the election (the news makes it sound like it’s up more, doesn’t it?). Additionally, interest rates shot up with the 10‐year U.S. Treasury moving from 1.8% pre‐ Trump to 2.3% today. That has pushed bond prices down 2.4% (prices and interest rates always move in opposite directions). I suppose investors figure the Trump policies will stimulate massive GDP growth and require lots of new debt to do so. But at this point, it’s all a guess. Will Trump actually do what he said he’d do while campaigning? Can he even do some of these things, legally or practically? What’s his history on promises and follow‐through? My gut tells me he’ll say more than he does. If so, the “Trump Bump” of the last month may be ahead of itself or need some adjustment, at least. That could come in December.
December Events to Watch
As we settle in to the last month of the year, it’s customary to relax, enjoy the holidays with family and friends, and feel gratitude. But markets never rest, and there is a lot to consider over the next month or so. There appears to be a global movement of disruption and populism. First, Brexit occurred in Britain in June. Then Americans voted anti‐ establishment in November. Italy is up next with a vote this weekend. And France votes in April. Without getting political, what these outcomes show is that many people in many countries are angry and fearful, and they want change. They are out to disrupt “the system.” Strictly as investors, what does that mean for us? I think it’s fair to assume the following: more volatility and uncertainty in the near term. With change, there will be winners and losers. This populist movement will surely slow global trade as policy changes attempt to “protect our own.” On the other hand, de‐regulation could spur economic activity – for better or worse. The markets will try to sort it out quickly but with information coming out as fast as it can be “tweeted,” it’s sure to be a wild ride.
The other big economic event in December will be the Federal Reserve meeting mid‐month and their near‐ certain decision to hike interest rates another 1⁄4 percent. This change in monetary policy (from stimulus to tightening) comes after nearly eight years of easy money. The hike is highly anticipated and already priced in so the actual announcement to hike rates shouldn’t move markets. But we’ll need to listen to what Fed Chair Yellen says on announcement day about future rate hike potential.
Don’t Give Up on Bonds
As mentioned earlier, Bonds had one of their worst months in years in November. The 10‐year U.S. Treasury rate bottomed at 1.4% in July and popped up to 2.4% today. A 1% move in 4 months is significant. The market is clearly pricing in the upcoming Federal Reserve rate hike of 1⁄4 percent and even more. But like the Trump Bump in stocks, I suspect that the spike in rates is overdone. The Fed is likely to raise rates in December and perhaps one more time in 2017. The economy simply is not strong enough to sustain higher rates. Rates are likely to stall from these levels. The last four times the bond market dropped 3%, like it did in November, including 2008, 2011, 2013, 2015, it was up 5% to 10% 12 months later. My point is, don’t give up on bonds. They play an important role in a portfolio and they just might outperform stocks and expectations over the next year.
Year‐End
We’ll be going through portfolios looking for any tax losses and other year‐end review items. If you have any unique circumstances we need to consider, please let us know. It was good year, all in all, and we all have a lot to be thankful for. Happy holidays, everyone.