And Boom Goes the Dynamite

The one (and only) thing that we all expected would come to fruition today is that volatility would reign.  Few people predicted a Trump win, and far fewer predicted a Republican sweep of Congress and the executive branch.  That said, it shouldn’t be a surprise that Republicans retained the Senate, because the factors that brought voters out to the polls for Trump surely weighed in favor of any down-ticket Republican.

The market reaction today is utterly wild.  It’s probably not a good idea to put anything in print, given how quickly the markets are changing.  Overnight, as the Trump rumors became a Trump reality, U.S. stocks were looking at an open in the down 4-5% range.  When the U.S. stock markets finally did open, they had recovered the entirety of that drop and opened nearly unchanged.  After a brief drop to the -1% range, as we write this, the Dow is actually up 61 points today.

Some well-meaning Republicans might ask why a Trump win, let alone a Republican sweep, could possibly be negative for stocks?  Meanwhile, whenever Clinton’s prospects for victory were on the rise, stocks were also on the rise.  Without diving too far into the weeds, pessimism on the Donald can be distilled into two main issues.  The first, and greater, issue is of visibility and continuity.  Investors don’t like abrupt surprises, and Trump’s campaign and platform are, by definition, abrupt departures from status quo.  Secondly, some of Trump’s policies, namely trade and immigration, would be negative for corporate America.  Free trade is good for corporate America, so any reduction of it could hurt the ability of companies to produce goods profitably.  Immigration is the only source of population growth in the U.S., and recent world history is littered with examples of countries who restrain immigration and have seen their populations stagnate (or decline) thanks to declining birth rates.  Their economies follow along….Japan, Russia, most of Europe.  Some would say the greater surprise today that the market isn’t getting shellacked more than it is.  We believe part of this is a relief rally simply because the election is over.

As the market is relatively flat, there are huge winners offsetting the majority of stocks which are down.  Drug stocks are way up today; Pfizer +7%, Abbvie +6% and Merck +6%, Gilead +7%, and J&J +2%.  The whole health care sector, but especially drug stocks, has been trading under the threat of a Clinton presidency which would try everything in government’s power to bring down drug prices.

Banks are another big winner today, as bonds sell off today, meaning that interest rates are higher, which is good for banks’ net interest margins.  There might also be hope for less regulatory burden on banks.

Finally, infrastructure stocks are booming today, for two reasons.  First, Trump plans a huuuuge government-funded infrastructure spending plan.  Clinton did as well, but Trump’s plan is bigger.  Secondly, and most significantly, if Trump’s plans to reduce free trade come to fruition, and recession can be avoided, there should be a boom in spending by companies to build more production capacity in the U.S.  This is called onshoring (opposite of offshoring), bringing production back to the U.S. from markets where production costs were cheaper (such as China and Mexico).  Engineering and construction companies like Jacobs are up big today, as are heavy equipment stocks like Caterpillar.  Steel stocks are also up big, with Nucor +11% and Steel Dynamics +8%, given expectations that Trump would slap huge tariffs on imported steel.

Multinationals in general are not faring well today, with most consumer products stocks down 2-3%, although safety stocks like Wal-Mart and McDonalds are both up.  Yield plays like utilities and real estate trusts are not faring well because interest rates are up so much.  Hospitals are the biggest losers, given that a Republican sweep might lead to an unwinding of Obamacare.  This would likely lead to lower patient volumes, an issue which also faces medical device companies which are dependent upon procedure volumes.  And finally, clean energy companies are down, and coal producers are up.

These are knee-jerk reactions, but they do make sense at face value, given what we know about the platform of both Trump and the Republicans in Congress.  We’ll synthesize our thoughts further on whether it makes sense to take any action given the surprise results of the election.

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