Thursday, November 10, 2016

Post Election

As I have often mentioned...the "stock market" is made up of "investors" and "speculating gamblers". Mr. Market fell into a severe depression as election returns came in, but somehow snapped out of it, emerging in a euphoric manic state as soon as he heard Trump's victory speech.

Before and after the election, the "speculating gamblers" were busy.  There were many smug commentators who predicted market directions who have turned out to be very wrong--as they usually are! At least in the first days, the market has gone almost exactly in the opposite direction they predicted.

There are lots of "bets" being made.  Just since Friday, 11/4:

CAT is up 15.9%. Crane maker MTW is up 44.5%.  Aerial platform and construction equipment maker OSK is up 15.4%.  

Vulcan Materials is up 18.3%. But the giant concrete supplier, CX is down 6.1%--probably because it is based in Mexico, even though it's operations in the USA are larger than in Mexico.

(Most of the rise in prices occurred before or at the open, the morning after the election!  A sure sign of computer algorithm driven gambling.)

XOM is up 5.2%. Coal miner, ARLP is up 8.8%. Coal hauling railroad, CSX is up 10.4%.

Healthcare bellweather JNJ is up 3.3%.

But, 20 year US Treasuries have fallen 5.4%. And utility ED is down 5.9%.

So the bets are all about a rise in construction, as well as a reduction in hate for fossil fuels, especially coal.  Any maybe drug companies will be able to keep raising prices.

These assumptions seem reasonable, but perhaps a bit overdone.

What I think is the most important "trend" is the expectation of higher interest rates and inflation that are underlying the fall in US Treasuries and Utility Stocks. The two most important determinants of stock prices are earnings and interest rates. And, interest rates are essentially driven by inflation expectations.

Contrary to fears of a market correction caused by uncertainty regarding Trump, the markets have priced in a "hope" of a rising economy that will result in higher corporate earnings, with added effects in part from expected cuts in corporate tax rates. This MAY be a reasonable assumption, BUT...

The "elephant in the room" is the fact that many stock prices are presently assuming a "lower for longer" scenario and the expectations about growth and tax cuts seem to indicate a high risk that this "lower for longer" scenario is wrong. IF markets abandon this "lower for longer" assumption regarding interest rates...then price to earnings ratios must decline...the market will need to be "repriced" lower even in the face of rising earnings.

The risk of the market being "repriced" continues to be high--not certain--but probable.  So, investors should be cautious, and "ready" to take advantage of lower prices later. 

Enjoy the euphoria of a market with upward momentum, but be skeptical.  The real future is still quite uncertain. 

This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.