In a continuing effort to let you know how things look from my desk, this is a follow up to my commentary last week. The market continues to surprise us- albeit in ways we did not anticipate. The post-election run-up, while looking good, was a wall of deception (no- not THAT wall!). While the numbers on the 6:00 PM News sounded great, it's important to understand what is happening in the market, and the drivers that ultimately lead to those euphoric numbers you've been seeing for the past 10 days or so. One would think, and I've gotten a number of calls about this, that the broad market and the average portfolio would reflect the jump in the market. Unfortunately, there is a great disconnect with the numbers you see at 6:00 PM and the actual broad market. First, let’s tackle the reason(s) for the fast run up in the Dow and S&P in the few days following the results of the election:
In my world, if you own a stock, you are recognized as "long" the stock. Long means you own it, possess it, and can do with it as you please- you own it. "Short" the stock means you don’t own it, but control a block (let's call it 100 shares in this example) meaning you can sell stock that you don’t actually own- but have a responsibility to deliver (the 100 shares) to the buyer in a certain timeframe. At one time prior to the election, the Vegas odds were 87% for Hillary to win, 13% for Trump to win (1). With those odds, it was anticipated that with a Hillary win, the market would go down, as well as with a Trump win. As such, brokers "sold short" stock, anticipating the market to go down, then buy the shares they need to deliver at a lower price than they sold them, deliver the stock to the buyers pocketing the difference. Unfortunately for them, things didn't go as they had planned. Trump won, and the market started to go up. Panicking that they would have to pay higher prices than they sold it short for, they stampeded into the market to fill their orders to buy and deliver the stock, driving up the market. So, for the most part it wasn’t the euphoria of a Trump win that drove the market, it was the “short-sellers” frantically buying to fill their orders. Thus, while the market was up on the DOW about 400 points, as much as 80% of the shares traded that day were not because of positive sentiment for the market, it was contributed to forced buying to fill the short orders. (2)
Additionally, as you know interest rates have been at 0% for the past 8 years or so. Every Fed meeting was led by speculation of rates rising, which did not happen for a long time. Finally, in a Congressional Testimony Fed Chairwoman Yellen said "the case for raising rates has strengthened, and a hike could come soon," while confirming the Unemployment Rate to be more stable than in a long period of time. The implied odds for a rate hike in December rose to a mighty 98%, and the 10-year Treasury, stagnant at roughly 2% yield for the past 8 years, rose quickly to just shy of 3% before settling down into the mid 2's (3). Additionally, retail sales came out with a positive number, and Export Prices topped projections, as well as Business Inventories. All sounds like good news, but the fact is that the good news did not correlate to the general market, just to the certain equities you might have been lucky enough to be in had you been in a stock picking, aggressive portfolio. All this did was drive down the price of bonds- the safe haven for investors- because when the equities market goes up, usually the bond market goes down. As you can see in the 10-year treasury facts above, you can see how fast the price of bonds dropped- affecting anyone who had a reasonably balanced portfolio. Stocks up-bonds down- confused and aggravated investor.
Remember that the DOW is just a grouping of 30 stocks, and if just 2 of the 30 are having a great day, you could have a positive DOW day, with 28 stocks actually being down. As I've expressed in my past commentaries, it's important to always remember why you are invested, and keep your long term goals in sight. Knee-jerk reaction will only prove to be hurtful in the long run. The post-election market has been compared to the Brexit vote- the United Kingdom's vote to exit from the European Union- a few months ago, with the markets being much calmer. The Brexit vote resulted in a large drop of the market, and within 9 trading days it was back to where it started. In our case, analysts predict just the opposite will happen. It’s going to take some time to find market direction. Go to work, kiss your kids, enjoy the holidays... let's keep an eye on things, and remember the world is not ending. Please feel free to call any time- we’re here to help and answer any questions. Certainly, it's an uncertain time for all, and this too shall pass.
Best regards- have a wonderful and Happy Thanksgiving!