We Got Trumped
Current Market Analysis
Last Month's Results
Trends To Watch
What I'm Thinking
News and Notes
Current Market Analysis
At least it's over. America, and perhaps the world,
has been Trumped. And that's all I plan to say about it. There's no
point in looking back; it's time to look forward. And to try and divine
what a Trump presidency might mean for the stock market and the
economy. So starting this month, that's what I'm going to do. I wasn't
planning on writing another newsletter this year, but I felt that so
much has happened, I should communicate one more time with my
Amazingly, although the Dow Futures were down
almost 850 points as it grew more apparent that Trump would emerge
victorious, the market turned around the next day and finished more
than 200 points higher. The gains continued over the next two days,
helping the broad market averages set new record highs. Indeed, the
959.38 points added by the Dow Jones Industrial Average for the week
was the best weekly performance in over five years, and powered the
#DJIA to a record closing price of 18,847.66, surpassing the prior
record of 18,636.05 on August 15. The S&P500 remains only 25.70
points below it's closing high from August 15. Overall, the broad
market looks to be in pretty good shape.
I've been saying since January that I felt
market would enjoy modest gains this year, and it's looking more and
more like that's exactly what will happen. If the market can survive,
and even thrive, after Donald Trump won the election, then it
seems as though only the Fed stands in the way of the market finishing
the year in the black. The Fed have been telegraphing a 25
basis point increase for months, so if they go through with it, the
market should absorb the news fairly well. At least that's the theory.
We'll see what happens next month.
Looking at the chart of the #DJIA, we see the
gradual decline in August, September and October, followed by a steeper
drop heading into election week, Then we see the violent surge higher,
taking the index right through resistance to a new record high. I
suggested last month that we would "remain in this channel until
after the election. If Clinton wins, we could see a bounce to a new
high. Should Trump prevail, we'll likely tumble below interim support
at 18,000 and possible test major support around 15,750." I was right
about staying in the channel, but completely wrong (fortunately) about
what would happen should Trump prevail.
chart of the Dow Jones Transportation Average, continues to look better
and better, as the prospects for an improved economy grow brighter.
President-Elect Trump pledged huge tax cuts and a massive improvement
to our infrastructure, both of which bode well (at least initially) for
economic growth. The index blasted through an important resistance
level around 8,250, and has attained a new 18-month high. The record
high, set in late 2014, is not so far away. Should this index continue
to move higher, it would be a strong indication of good things to come
for the market and the overall economy.
As you can see below, the Dow Jones Utility
Average is not looking so good. To be honest, I'm not sure why things
turned bad in July, other than the possibility of the rate increase
that is forecast for the end of the year. Even so, a 25 basis point
rate increase should not crater this sector, which thrives when
dividend yields are relatively higher than the yields on "risk-free"
government bonds. As rates rise, the difference between the
two payouts shrink, decreasing the appeal of utility stocks. If support
around 610 is violated, it may be a signal to reduce exposure to this
After falling to 1.33% in July, which was the
lowest rate in recorded history, the yield on the 10-year
treasury bond moved steadily higher for three month.
Then last week it exploded higher, reaching the highest level
since January. The Treasury yield is now just over 2.1%, and moving
higher still. I think rates are moving higher on the
assumption of a December
rate increase, a stronger dollar (see below) and a rotation from bonds
to equities. The question is, "how high can they go?" I don't think
we'll see 3% any time soon, but time will tell.
Even though equities are still solidly in the black
for the year, the broad market averages were actually down slightly for
three months in a row. I was completely wrong about who would win the
election, and equally wrong about what would happen if Trump won. While
US government bonds continued
to produce positive results (not so much the last few weeks, during
which the losses are building up), they were still outperformed by most
of the broad
domestic averages, and value continues to
beat growth. Now we just wait to see what happens with the Fed in
Name of Index
Dow Jones Industrial Average
Large-cap tech stocks
Russell 1000 Growth
Large-cap growth stocks
Russell 1000 Value
Large-cap value stocks
Russell 2000 Growth
Small-cap growth stocks
Russell 2000 Value
Small-cap value stocks
Europe, Australia, Far East
US government bonds
Barclays High Yield
High-yield corporate bonds
* Returns include the reinvestment of dividends
to the Department of Labor, the
figure for seasonally-adjusted initial jobless claims for the week
ended November 5 was 254,000, a drop from the prior
week, and about the same as the prior month's figure.
The four-week average of 259,750 was about the same as the
tally from last month. The number of jobless
claims continues gradually decline. About 2.04 million people continue
to collect unemployment
insurance, which is the lowest level since July 2000.
non-farm payroll employment report in October was slightly
161,000 jobs were gained in the month, while 44,000 net jobs
were added in the
prior two months. The household survey reported that the unemployment
rate remained at 4.9%. The labor force
participation is 62.8, where it's been for most of the
year. Average hourly wages for blue collar workers
rose to a new high of $21.72 while the average work
week remained at 33.6 hours for eight of the
last nine months.
million workers were still counted as
unemployed, and 2.0 million people remained
unemployed longer than 27 weeks. The seasonally
adjusted number of people who could only find part-time work dipped to
5.9 million while the number of marginally attached workers
held at 1.7 million. The number of people holding multiple
jobs has increased to 8.05 million. All of this means the
comprehensive U-6 "underemployment" rate fell to 9.5%. Our
economy remains close to "full employment".
Congressional Budget Office (CBO) estimated that on a net present value
basis, the Treasury reported a budget deficit of $587 billion in
fiscal 2016, $148 billion more than the last fiscal year. The
deficit, as a percentage of GDP, grew from 2.5% to 3.2%. The deficit in
October was $46 billion, far lower than the prior year, thanks entirely
to the difference in the timing of payments year-over-year.
Census Bureau reported that privately owned housing starts
fell 9.0% to 1,0147,000 in September, down for the second straight
month, and was 11.9% lower than a year ago. New building
were rose 6.2% from the prior month and were up 2.2%
from the year before.
Census Bureau reported that on a seasonally adjusted annualized
basis 593,000 new homes were sold in September, up
3.1% from August, and 29.8% from a year ago. The estimate of the
number of homes for sale was 235,000, representing a slim 4.8
months of inventory at the current rate of sales. The median sales
price was $313,500, near the highest total of the year, and well above
the 12-month moving average price of $305,850.
National Association of Realtors reported that over 5.4 million existing
homes were sold in September, up 3.2% from the prior month,
and roughly flat from a year
ago. The estimate of the number of homes for sale was 2.04 million,
representing a tiny 4.5 months of inventory at the current
rate of sales. The median price was $234,200, up 5.6% from last year,
and about $5,000 above the rising 12-month moving average price.
Overall, the housing picture looks solid if unspectacular.
to the Institute for Supply Management (ISM), economic
activity in the manufacturing sector expanded again in
October, rising from 51.5 to 51.9. The ISM index of
non-manufacturing activity was 54.8, down from 57.1, which still
signaled growth in the service sector for 81 consecutive months.
Conference Board reported that its index of Leading Economic
Indicators (LEI) increased 0.2% in September, following a decline of
0.2% in August. "The U.S. LEI increased in September, reversing its
August decline, which together with the pickup in the six-month growth
rate suggests that the economy should continue expanding at a moderate
pace through early 2017," said Ataman Ozyildirim, Director of Business
Cycles and Growth Research at The Conference Board. "Housing permits,
unemployment insurance claims, and the interest rate spread were the
main components lifting the index in September. Overall, the strengths
among the leading indicators are outweighing modest weaknesses in stock
prices and the average workweek."
to the "advance" estimate by the Bureau of Economic Analysis,
GDP increased at an annual rate of 2.9% in Q3 2016. This compares
favorably with 1.4% in Q2, 0.8% in Q1 and 1.4% in Q4
2015. It even managed to surpass the 2.0% achieved in
Q3 2015. This report, will help give the Fed cover to increase its
lending rate by 0.25% in December.
to the BLS, the seasonally adjusted Consumer Price Index
for all Urban Consumers (CPI-U) increased by 0.3% in September, after
an 0.2% increase in August. The index for all items less food and energy
increased by only
0.1% in the month.
Over the last 12 months, the all items index rose a
modest 1.5%. No matter what the Fed does or wants, inflation remains
below their 2.0% target.
Conference Board's Consumer Confidence Index decreased to 98.6 in
October from 103.5 in September. Consumer
confidence retreated in October, after back-to-back monthly gains,"
said Lynn Franco, Director of Economic Indicators at The Conference
Board. "Consumers' assessment of current business and employment
conditions softened, while optimism regarding the short-term outlook
retreated somewhat. However, consumers’ expectations regarding their
income prospects in the coming months were relatively unchanged.
Overall, sentiment is that the economy will continue to expand in the
near-term, but at a moderate pace."
dollar index looks to be forming a jagged, yet quite discernable "V"
pattern. It began the year around 100, fell to around 92 at the end of
May, and has returned (as I write this) to 100 here in mid-November.
Normally a strong dollar would mean a weak stock market, but that has
not yet been the case. Eventually, this strength in the currency will
impact the earnings of our big multinational corporations.
twice this year failing to move above resistance at $52, the
price of West
Texas Crude is rolling over and heading lower again. This could be
happening partially because of the strength in the dollar, and
partially on concern that OPEC may not, as expected, but in some
production curbs. Also, if a Trump presidency allows further pipelines
from Canada, and more drilling in general, both of which could
increase domestic supply, it could result in even lower prices
price of gold is getting clobbered since the election. As with oil, a
stronger dollar diminishes the relative value of gold. Also, as it
appears, at least for now, that Armageddon has not occurred since
Trump's victory, some of the reason for owning gold is waning. And
finally, higher interest rates may also lessen the desire to hold gold,
which does not pay any interest.
chart of the Nasdaq Composite paints a rosy picture. Except
for a couple of brief swoons in the summer, this index has moved
inexorably higher for the past eight months. Until election day. You
can see it here, but tech stocks have been getting creamed in the past
week as investors are worried about retribution by President-elect
Trump for Silicon Valley's support of Hillary Clinton, and because of
possible trade wars hurting these large, multinational business.
Alphabet (GOOGL), Amazon (AMZN) and Apple (AAPL) in particular
are bearing the brunt of the selling. As a result, I think there will
be a very interesting buying opportunity in those names sometime
financial sector appears to be another beneficiary of the Trump victory
as the thinking goes that he will repeal Dodd-Frank, and perhaps other
regulations, thereby releasing banks from some of their regulatory
shackles. In addition, higher interest rates means higher lending
margins, which will goose earnings. As you can see, the index has
surged to a new high, rewarding patient investors. I told you
last month that "my
financial stocks are long-term holdings and I'm not selling
anything" ; that has proven to be a good call.
not sure what impact Trump may have on the housing sector. Rising rates
could be a bit of a drag on the sector longer term. More immediately
though, if people think rates are moving higher, there could be a
short-term spike in transactions as a buyers try to close before rates
move up appreciably. So looking ahead, I would expect the index to
remain in the trading range outlined between the dotted green and the
all the pronouncements of treaties (like NAFTA and TPP) being ripped
up, and possible trade wars, I would continue to stay away from the
index for developed
international markets. Even if none of that comes to
pass, thanks to negative
interest rates and low (or no) economic growth, it's hard to make a
case for any real gains in these markets in the near future.
NYSE Bullish sentiment index has traded in a
fairly narrow range for
the better part of the last nine months. It's interesting to note that
after briefly falling through support earlier this month, the
price is just now moving higher. This suggests that the current rally
probably has further to go.
After dropping to absurdly low
levels over the summer, the
price of the volatility
index, or the VIX, got busy again starting in September. Volatility
moved even higher last week, peaking around Election Day. And yet even
with the surprise result, the index did not break through resistance at
24. And now, only a few days after the election, the VIX has dropped
almost 40%, back to the balance section of the trading range. Just
Thinking and Doing
In order to give you some clarity on what I'm
thinking today, I'm going to provide an excerpt of an email I sent to
my clients last week, the day after the election.
this isn’t the letter I thought I’d be
writing today. There’s no secret as to where I sit on the political
spectrum. Like many of you, I’m upset and disheartened by the results
of the election. I clearly got that one wrong, as I felt strongly that
Hillary, and common sense, would prevail. That being said, I also
believed that a Trump victory would result in stock market carnage, and
so far, that too has proved to be wrong.
The surprising fact is that the
market is trading
between flat and modest gains so far this morning [11/9]. So at least
for today, the 5-10% loss I was expecting has not materialized. So what
does this mean for us (financially, not morally or socially)?
The pharmaceutical and biotech sectors are soaring, as they had been
sinking on fears that Hillary would have imposed draconian price
controls. This helps us.
defense sector is soaring, for a number of possible reasons. This helps
two key railroad holdings are up, presumably on expectations of
infrastructure spending and greater economic growth. This helps us.
is down big, along with consumer staples, food and beverage,
thanks to the possibility of Trump instigated trade wars hurting the
large multi-national companies. This hurts us.
and utilities are down today as rates increased, I suppose on
the thinking that we’ll have a more hawkish monetary policy. This hurts
is neutral; longer term this sector could benefit from less price
controls. That would help us.
cap industrial stocks are up thanks to the infrastructure play
I mentioned earlier. This helps us.
finance sector is broadly up, especially the banks, as higher
interest rates would goose earnings. This helps us.
where does this leave us? On
balance, we’re probably neutral for
now. Looking ahead, it’s really hard to tell. The biggest question is
trade. Will he really attempt to abrogate NAFTA? Will he rip up other
trade deals? Will he start a trade war? Or was all of his bluster
simply campaign rhetoric to garner votes (it worked)? Only time will
for now, I may make some modest tweaks between now and the end of
the year, but I’m unlikely to make any substantive changes. As always,
if you have any questions about your specific situation, please feel
free to contact me at your convenience. And as usual, I thank you very
much for your continued faith and support."
think that letter pretty well covers what I'm thinking. As for what I"m
doing, I'm going through all of my holdings, trying to identify and
individual securities, or sectors, that may be fundamentally
disadvantaged by a Trump Presidency. Or any holdings that have fallen
to "mental stop" levels. I'll spend the next six weeks sifting through
everything and making decisions as to what, if any, holdings should be
sold. For now, I'm sitting tight.
worked hard over the past five or six years to cull my smallest and
weakest positions. On October 31, 2011, I held 156 total securities
through WAM. Today, I hold only 99. Some of that occurred through
attrition, but most of it was a conscious decision on my part to focus
my holdings on my best ideas. I expect this basic trend to continue
into next year. For the most part, except for two busy weeks during
broad market declines, this has been a pretty quiet trading year for
me, and I don't expect that to change between now and the end of the
News and Notes
is little new to report on the home front since last month. The kids
are all working diligently at school. Nola is starting to think about
life after college. Lily is looking for summer intern programs. Ezra is
prepping for the SATs. The good news is that the family will be all
together next weekend for Thanksgiving, then again next month for
Christmas vacations. It'll be good to have the girls back
is special as Kathiryn
and I celebrate our second wedding anniversary. It really is hard to
believe that we've only been married for two years. While we've been
together for a little over five years, the time has really flown by. I
am beyond blessed to have such a spectacular woman in my life. She has
made everything brighter and more beautiful for me. In every sense of
the word, and in every possible way, she is my ideal partner and I
cannot be happier to have married her two years ago. I love you Babe!
many of you know of my deep commitment to philanthropic causes. You
also may know that I am a very active member of the Board of Directors
of the Food Bank for Westchester. For the next six weeks, thanks to a
very generous offer by the Bank of America, donations made through
their website, under the auspices of Feeding America, can be TRIPLED!!
Any single donation, up to a maximum of $1,000, will become $3,000, up
to a total of $75,000. All you have to do it go to
www.bankofamerica.com/give, fill in a dollar amount, put in the zip
code "10523", then click "your local food bank", and the
Food Bank for Westchester will receive the proceeds. If you give a gift
of $100, we will receive $300, which means we'll be able to buy $1,200
worth of food to help feed our hungry neighbors, who total about
200,000! So thank you in advance for your consideration and your
it for now. I look forward to communicating with all of you via
twitter, my blog and this newsletter throughout the rest of the year.
I wish all of you a very Happy Thanksgiving. Maybe you can donate a
turkey to a local soup kitchen or food pantry, or go serve a meal one
night. It's an experience you'll never forget.
and Views", Copyright, Werlinich Asset Management, LLC and
www.waminvest.com. All Rights Reserved.