Being prepared for the unpredictable. That’s what it’s all about now.
Written by: Benjamin Bimson CIMA® / BCJ Financial Group
Blimey! I don’t think very many people saw the great Presidential upset coming! Oh, I heard arguments about a “Brexit” like outcome and many thought it was possible, but they also thought that the market would come crashing down in a fashion perhaps worse than it did in June after the surprise Brexit vote.
Late Tuesday evening, that was looking to be the case and I confess I was running scenarios. Then, in a mighty turn-around the market recovered. Industrial stocks hit all-time highs. It was a double surprise. The kind that is okay for those who remained invested.
As the world scratches their heads, it is apparent that the manner of gathering poling data, in an age where Millennials are playing an increasing role, is seriously flawed. Somebody is missing something! I wonder how long the Millennials; the marginalized voters and independent voters are going to be ignored. My guess is that it will continue for as long as the polls are controlled by the same old- same old. My prediction is that more surprising outcomes will happen in the future unless techniques and reporting changes. I’m not holding my breath. I just expect we will have some more surprises.
So, where from here? You might be tempted to be concerned that the markets cannot possibly do well under a completely Republican controlled government. Not so fast. We have attempted to be fair in our predictions. It is no doubt that historically the market has performed best under a Democratic President and a split congress. However according to the data from the last 115 years (seen in the chart below), the biggest annual returns only occurred 3.46% of the time. The second largest annualized returns are under a fully Republican government and occurred 22.49% of the time.
We have heard various arguments about whether the President-Elect Trump is a “real” republican. That is not a debate for us to weigh in upon. I think that depending on which campaign promises he chooses to fulfill, the US corporations are likely to see increased earnings, and that is good for market growth and also something that has been declining for the past two years. Lower taxes, a plan to return expatriated dollars to the US, infrastructure projects, military spending and making healthcare more affordable is all going to increase the economic thrust of this nation.
This is not an argument that there are not risks. There are always risks. Possibly foreign policy can be identified as a very real risk. Unfortunately, we are going to have to wait a few more months for realization of any of this, but rhetoric is evident that the above mentioned economic expansionary policies are very realistic and should be a freight train to pull us forward.
One item that is very keen to be brought up by economists is that these policy positions would likely increase inflationary pressure. That is good to a point. We need inflationary pressure at this point, we just do not want too much. That is where the Fed is going to be coming into play. The Fed is very much on track to raise rates in December as seen in this final chart for this week.
Shocking election results are apparently a hallmark for 2016. The markets have remained resilient and we are cautious in our tactical models. Currently, those of our clients in those models are fully invested but the models remain very sensitive to macro-economic changes and will remain so until there is confirmation that the market progress can be maintained.
Being prepared for the unpredictable is what this is all about today. So far data we watch daily has not let us down, but we continually strive to make sure we remain on the cutting edge to help navigate this interesting environment.
1-U.S. Markets Ned Davis Research Group. November 10, 2016 [11/11/16]
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