Post Election Market Reaction

The good news is that we’ve finally witnessed the end of the nastiest presidential contest, arguably, since the Jackson-Adams campaign of 1828. Both sides have been hurling vitriol and fomenting enmity since the middle of last year. We’ve been awash in media coverage spiked with an embarrassing amount of propaganda and blatant dishonesty. WikiLeaks documents have revealed appalling levels of corruption and collusion with an increasingly one-sided media. Notwithstanding all the noise, warnings and threats, however, the election results were surprising to many and some Americans are having difficulty accepting the results. The bad news is that the upset will unfortunately not mark the end of the divisive rhetoric. President-elect Trump’s policies and appointees will continue to be scrutinized and opposed at every opportunity while re-count efforts in three states serve to delegitimize the Republican victory.

Don’t Trust The Hype

While it’s easy to get caught up in the day to day news reports, it’s often not so easy to keep current events in historical perspective. Compounding the difficulty, the media giants have unfortunately done a tremendous disservice to the American people by allowing themselves to be influenced, and is some cases, controlled by progressive political interests. Over the last 30 years or so, there’s been a tremendous consolidation within the media industry. The Business Insider reports that since 1983, the number of companies controlling 90% of the media in the U.S. has shrunk from 50 companies to just six, only one of which can be argued to support traditional or conservative principles. Even more disturbing is that means a few hundred media executives control the overwhelming majority of the information consumed by over 300 million Americans. So, Trump’s victory is only shocking to those who bought into the propaganda paradigm created by the leftist, political-media machine. Sadly, the shock and anger is misplaced. The real, deserved recipient of the ire is the media itself, who so effectively misled the public.

Impact of Policies

Regardless of your personal opinions over the outcome, there’s no denying that at least so far the U.S. stock markets have responded favorably to the Trump victory. Large stocks have posted a nearly 2% increase between November 9th and 29th, while small stocks roared up nearly 8% for the same period. Investors are clearly betting on U.S. companies benefiting from the policies of a Trump administration. Specifically, Trump’s plans for reducing the federal corporate income tax from 35% to 15% is expected to boost domestic investment. Paying less tax means that profits
become cheaper, which increases return on corporate investment. Investors are also encouraged by the one-time repatriation fee of 10% versus the typical 35% rate. Sure, it’s arguable that companies have already devised ways of getting their cash back to the U.S. without paying much tax, but doing so requires resources and relationships that not all companies with international concerns have. Trump’s also proposing an end to the tax deferral on corporate income earned abroad, which removes much of the incentive for U.S. companies to leave it there and prevents this scenario from reoccurring.

SP 500 GraphDespite the strong showing, there are still plenty of detractors. Fortunately, most of them can be ignored as the special interest mouthpieces they’ve been exposed to be. More importantly, though, it likely doesn’t really matter that much long term. On election night, once it was clear that Hillary’s chances of victory were zero, Dow futures were down more than 900 points for a time before rebounding and foreign markets lost value across the board. Markets tend to overreact to presidential elections. According to a recent cnbc.com article, the S&P 500 has posted gains of an average of 3.7% between Election Day and inauguration day for the past 16 presidential elections. So, this post-election exuberance is not at all uncommon. More telling will be the trading days following inauguration. Since 1952, rates of return have trended up following presidential inaugurations by an average of 4.6% at 200 days post inauguration.

Stock Market Performance vs. Economic Growth

What’s really more important than stock market averages is the overall U.S. economic performance. While there’s certainly a relationship between healthy, growing companies and positive GDP growth, a high-flying stock market doesn’t necessarily depend on a flourishing economy and vice-versa. For example, the S&P500 has returned an average of 15.11% per year since 2009, which is rather good compared to the longer-term historical average of around 11%. GDP growth, on the other hand, for the same period has been anemic at best at about 1.5%, and that’s in spite of record government spending, which is included in GDP. In contrast, a growing economy leads to increased wages because the demand for labor increases as more jobs are created. More jobs also lead to more consumer spending, which is the largest contributing component to GDP. So, the potentialities of job growth and reduced tax burdens for both businesses and individuals are enough to energize investors about near-term prospects for both the market and the broader economy.

The expectation is still that interest rates will continue to rise as a means to moderate the expected growth and theoretically prolong the expansion and combat inflation. We feel that our models are well positioned to take advantage of those conditions without assuming undue risk. The volatility will likely continue and we expect short term declines as investors take profits and companies adjust to the challenges and costs of growth.

As we close out the year, we’d like to convey our sincere appreciation for the trust you have continued to place in us. We are honored to serve as your trusted advisers and are continually seeking to improve our services and exceed your expectations. Along those lines, we are proud to announce that in September FMI became only the second firm in the state of Arkansas to be certified by the Centre for Fiduciary Excellence (CEFEX). The certification resulted from an independent assessment of our investment practices as compared to a defined Fiduciary Standard of Practice. The regulatory environment is an ever-changing landscape and FMI’s CEFEX certification is evidence of our commitment to making the needs of our clients our top priority.