Weekly Market Scorecard – December 16, 2016
- The stock market is up 5.5% since the election.
- The Trump rally is still intact.
- Investors have high expectations of Trump.
- The bond market continues under selling pressure.
- Market volatility is low, which could indicate complacency.
For now, let’s review the market internals for the week just passed.
The stock market is up 10.5% year-to-date. 5.5% of that has come from the post-election Trump rally. Investors are clearly optimistic about the new administration, and they have high expectations that Trump will deliver on his campaign promises.
Other positive signs for the market include short-term momentum, the number of stocks participating in the rally, and the number of up days out of the last ten trading days.
The bond market is sending a mixed signal. Treasury bonds have been selling off since the election, which increases the cost of borrowing for everyone. But junk bonds are holding up well. One way to rationalize this disparity is by assuming that junk bond investors might believe that corporate earnings will be good enough next year to reduce the junk bond default ratio.
The Trump Rally
Investors are still in a buying mood since the election, but their enthusiasm is weakening. The orange line is a simple trend line, which shows a slightly downward trajectory of daily gains in the market.
Top performing market sectors
Looking at the one month performance of the ten primary market sectors allows us to drill down below the headline number and look at the undercurrents of the market. We can see that telecom, energy, and financials are the clear leaders in the post-election market. The broad theme at work here is the anticipation of the deregulation, tax cuts, and infrastructure spending that was promised by candidate Trump.
Health Care is the laggard over the last month, as the drug makers and hospitals were hit by investor worries about what might happen to them when Obamacare is repealed. There’s a lot of uncertainty about this issue, and investors hate uncertainty.
Top performing industries
The surprise of the last month is the strong performance of the telecom industry. It may just be a bounce from oversold conditions, but it also reflects the expectations for deregulation in this highly controlled industry.
Last month I reached out to the 323 people who read this letter and I asked them to email me at email@example.com if they wanted me to continue publishing specific stock ideas. I only received about a dozen responses, so I’ve decided not to continue the list.
Keep in mind that it takes me about 45 minutes to run the screens and put together the list each week. Since I do this on Saturday, I think it would be much more useful to readers if I spent that 45 minutes on market research and trend analysis, instead of stock-picking. I remain open to bringing this feature back, but only if there is enough demand for it.
There is no question that investors approve of the incoming Trump administration. The rally may continue, but it feels to me like there isn’t a lot of upside left. Trump will have a tough time convincing the people who write the checks (Paul Ryan) that big spending coupled with big tax cuts are a good idea. The bond market has recognized this risk, and has sent a clear signal to policy makers.
As Ben Graham said, “In the short term, the market is a voting machine. In the long term, it’s a weighing machine.” The market has already voted for Trump. Now it will start to weigh the likely impact of his agenda as it unfolds in real time.