Trump rally defies market consensus

Market Recap

There is no doubt that last week will be a week to remember for the world, the election of Donald Trump as President. For all the fear around such a result in the lead up to voting day, it turned out to be a stellar week for the major global equity indices. The Emerging markets were more challenged as the US dollar moved sharply higher. Perceived safe-have assets such as gold and government bonds sold off amidst the Trump optimism.

It was amazing to witness how quickly sentiment changed towards the Trump victory, from a sharp sell-off to outsized gains for stocks. The reality is that the collective in financial markets care less about what impact Trump’s policies will have on people and the environment, but more about which companies stand to make the most money out of his policies.

A surprisingly positive week for equity markets…..

In Europe, the FTSE Eurofirst 300 rose +2.78% for the week. The German DAX index was one of the standout performers, up +3.98%, while the French CAC 40 rose +2.55%. Despite concerns about the future of Ireland’s low corporate tax business model, the ISEQ Index was up +5.01%.

The Dow Jones Industrial Average enjoyed its best week since 2011, up +5.36%, as market participants clamoured to get a piece of the Trump rally, predicated upon less regulation, lower corporate taxes and fiscal stimulus.    The S&P 500 index ended the week up +3.80% while the tech-heavy NASDAQ Composite rose +3.78%.

Pharma and Biotech stocks have been a big beneficiary as Clinton had talked tough on tackling drug pricing. The NASDAQ Biotech Index rallied +14.35%. An all Republican government has also done wonders for prison stocks. Corrections Corporation of America (Ticker: CSW: NYSE) jumped +43.13% on Wednesday.

If you weren’t aware, the US actually has privately owned and operated prisons, something that has become big business under a government policy of mass incarceration that has perpetuated racial discrimination. Think about the fact the US has 5% of the world’s population but they have 25% of the world’s prison population. The land of the free! I highly recommend you watch the documentary 13th on Netflix. See Trailer.  An eye opener.

In Asia, Japan’s Nikkei 225 index rose +2.78%, while China’s Shanghai Composite Index of mainland shares ended the week up +2.26%. Overall, it was a mixed week for emerging markets, with the likes of Mexico hurt by a stronger US dollar and concerns about a more protectionist US under Trump.

Bond markets sell-off on speculation Trump will ‘reflate’ the world!

Government bonds sold off last week. With yields moving inversely to prices, the German 10-year bond yield rose 17bps to 0.31%. The US 10-year treasury yield rose 34ps to 2.12%. Looking at longer term bonds, the German 30-year bond yield has moved back above 1%, from a low of 0.33% in early August. This represents a loss of around -15% over this period. The rise in yields is a major positive for Defined Benefit pension schemes, particularly if equity markets hold up.

 Market schizophrenia….

The coming weeks are likely to be dominated by the announcements from Donald Trump on the transition of the White House. If anything the reaction we have seen in financial markets over the last week are a further reminder of their schizophrenic nature.

We have seen it with US monetary policy, where one week interest rate rises spell Armageddon for our debt-fuelled world, the next week rate hikes are being cheered as a positive for banks and other financials. We are currently in ‘rate hikes are good’ mode.

Much of the focus has moved to fiscal policy, hopes that Donald Trump is going to embark on a huge spending binge. Forget the fact that the US government debt is heading to $20 trillion. While we have had years of worrying about deflation, the newly coined term is ‘Trumpflation’, with Trump’s spending policies expected to generate more inflation.

Most of what we see in financial markets in the short term is just noise and the full impact of last week’s result has yet to play out. BREXIT, the Trump victory and the rise in anti-establishment movement potentially reflect a tipping point of a cycle that has lasted over 35 years.

The rise of the likes of Trump has not happened overnight, it has been in the making for decades. Likewise, one stellar week for equity markets should not be extrapolated as confirmation that Trump will reignite the global economy and corporate profits. This story has just begun!

If you want a break from the Trump noise, this Christmas add from John Lewis is worth a watch John Lewis Christmas Advert 2016 – #BusterTheBoxer