Wed, 9 Nov 2016
Our take on why the market whipsawed in the wake of Trump's election victory, and what should be on your radar looking ahead.
Jason Stipp: I'm Jason Stipp for Morningstar. After swooning more than 700 points in the immediate wake of the election on Tuesday, we saw stocks actually end up about 1% on Wednesday. Here to talk about the dramatic shift is Morningstar editor Jeremy Glaser.
Jeremy, thanks for being here.
Jeremy Glaser: You're welcome, Jason.
Stipp: This is almost textbook definition of a whipsaw. We saw dramatic move lower in the futures under pretty light trading at first, but then a really dramatic turnaround. We were flat at the open on Wednesday and then we ended up over 1%. Why the big turnaround? What was behind it?
Glaser: Trading over these past couple of days really teaches you how difficult it is to predict short-term market movements even when you have a piece of news that you think you know what it's going to say, you see the futures down and then we end up, up like you mentioned.
I think there's a couple of things behind this. I think first is, there was some relief just that the election is over and that it wasn't going to be any sort of contentious ending. I think that certainly helped a lot. That wasn't entirely clear at parts of last night. I think also the fact that so far Donald Trump has been very conciliatory in his discussions of where he is going next, I think, that's heartened the market.
But I think also what's happening is because a lot of investment professionals, a lot of the people who are making these trades, hadn't really thought of what a Trump presidency would really look like, they are now just starting to kind of price that in. I think we saw that throughout the day, and we saw particularly in the way that different sectors were moving and in the bond market maybe some hints of what the market is guessing at what the Trump administration will do.
Stipp: So, specifically, what were some of the drivers behind that?
Glaser: Yeah, let's start with the bond market. The 10-year went over 2% for the first time since January. It was the biggest move in three years. I think this is really a bet that we're going to see some more deficit spending and that potentially could move inflation a little bit. I talked to Bob Johnson about this earlier today. And that's on the back of some tax cuts that could be coming with Republicans controlling the House and the Senate and soon the White House, we very well could see a tax cut package come through. And then coupled with more spending, Trump doesn't seem like someone who is averse to spending and we see infrastructure as something that could be a big-ticket item and you could get bipartisan support for that. Defense is something he has talked about, spending more there. So, you combine those two together, you end up with a bigger deficit potentially that drives inflation. I think that's part of what's happening with the bond market there on kind of the longer end of the curve.
But in the short term, it seems like the Federal Reserve is now less likely to raise rates right away. They have been very cautious whether it's been any kind of dislocation in the market in not upsetting the apple cart there, and I think we're going to see that in December that it's less likely they are going to raise rates. I think that kind of heartened investors a little bit in the short term. Now, we think, and Bob Johnson described this as well, that maybe they will raise rates a little faster after that in order to keep in front of that potentially inflationary moves. But on the bond side, I think you really saw those new initiatives being priced in.
Stipp: So, in the wake of the election results Morningstar stock and fund analysts really took a close look at what this might mean for the equities and the funds under coverage. Let's start with stocks. Any big wholesale changes as a result of last night's election?
Glaser: No fundamental changes to the way that we look at stocks. We're still long-term investors. We're looking out over the long term and anything that's happening with one election, with one budget cycle, in most cases, is just not going to move the needle on where we see valuation and what we see happening with the competitive advantages with our economic moat ratings.
That doesn't mean there were no changes. I think there were some areas where we've already made some. Western Union is one example. Brett Horn brought down his fair value estimate a little bit, increased his uncertainty rating, given some of the restrictions that we could see in immigration, that business is very leveraged to immigration.
Damien Conover, who is one of our healthcare analysts, wrote about how we potentially could see some changes in the healthcare stocks. We haven't made any yet. But as we see some proposals for what will replace or what will enhance or change Obamacare as that's something that's likely to be looked at. We could make some changes there. But he doesn't expect any kind of enormous ones despite some of the really big increases in prices we saw today among some of the drugmakers, more of a relief rally without some of the concern that Clinton would really come down on drug pricing. So, that's an area where there might be some changes.
Defense is another place that we think if there is more defense spending, potentially that had kind of been our bull case, that you'd see a lot more spending for these companies, so maybe those models lean a little bit more toward the bull and a little bit less from that bear case. But that's not spending that is going to materialize any time soon. The Pentagon takes some time to make these decisions, and Chris Higgins, who is our analyst on a lot of these names, isn't moving anything right now. Obviously, something that's on his radar and we might see some changes. But again, nothing hugely dramatic. This is not a situation where it really fundamentally changes the way that you think about investing, fundamentally changes the way that you think about why you'd want to own different companies, just more changes on the margins.
Stipp: And on the mutual fund side, we have Morningstar's Analyst Rating for funds, which is a forward-looking rating that our fund analysts put on funds, and they give funds medalist ratings if they think they are going to do well against funds that are similar. Any big changes to the analyst ratings or our prospects for funds?
Glaser: None there. Jeff Ptak, who is our head of our global manager research, wrote an interesting piece today where he describes that thinking about managers who think are going to have strategies or funds that have strategies that are going to outperform their category over time, those same managers we still think are going to be able to do that now. We think if they have the right process in place, if they aren't any dislocations in the market, they will be able to take advantage of that or will be able to really not be as hurt as by some other people in their categories and we still have confidence in those strategies.
Stipp: We've seen some big swings in the market, Jeremy. I'm not going to ask you to predict what we might see. But if you looked ahead at what some things that could move the market, what should investors be sort of keying in on as potentially market-moving events in the days to come?
Glaser: I think one of the things that will be in very sharp focus is trying to figure out what will be President-elect Trump's priorities when he takes office. What's kind of that first 100 days look like. And if you look at Cabinet appointments, if you look at some of the rhetoric that comes out of the transition team, I think that's going to be very important, and you could see particularly sectors that could be really helped or hurt by that, whipsaw around depending on what is said there. I'm not saying you should try to front run that or try to figure out exactly to buy the Trump stocks in order to ride that wave. We saw this week that kind of timing is extremely difficult. But I think that really could drive a lot of volatility. I think the Fed and what's happening to the interest rates will be very much in focus. There will be a lot of talk about that as well. I'd expect that that to be a big topic of conversation as we move toward inauguration day.
Stipp: So, Jeremy, given all of this and that we might see some volatility coming up, if I'm a stock or a stock fund investor, what should I be thinking about for the next few months?
Glaser: I think you should try to remain as kind of calm as possible and really try to stay the course here. So, the first thing is to look at your asset allocation. Maybe with this bull market your stock allocation has gotten too high for your time horizon. So, maybe this is a time to think about rebalancing. Christine Benz has written about this. She just wrote about it today, that this is a time to maybe think about that. But for the most part, if you are comfortable with the amount of stocks that you own, or you're comfortable with either the managers that you've hired on the mutual fund side or with the companies that you bought on an individual stocks side, you have to just kind of let that play out over time. And yes, we could see some volatility as we try to figure out exactly what the new administration looks like and what some of this new economic policy can look like, the fundamentals economics of most of these businesses are going to be unchanged. And I think that's really the thing to keep an eye on. So, trying to time the market, again as we saw this week, is unbelievably difficult to do. I think staying invested and really making sure that you are within kind of those asset allocation boundaries is what's going to be crucial.
Stipp: Jeremy, lots of great coverage on the election on Morningstar.com. Thanks for that wrap-up today.
Glaser: You're welcome, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.