initial reaction

Very early yesterday morning, S&P 500 index futures had fallen by 5% as the stock market gave its first verdict on the election of Donald Trump as the next president of the US.

That Mr. Trump’s surprise win should be met with initial selling isn’t itself so shocking.  Trump himself had offered a Brexit metaphor to describe his potential victory. (In trading the day after the Brexit results were announced both the British stock market and the pound collapsed.)  And an op-ed in yesterday’s UK Guardian, for example, describes Trump as having ” a folly so bewildering, an incompetence so profound that no insult could plumb its depths” as well as being “the least-qualified candidate of all time.”

What’s noteworthy is that, unlike the Brexit case, the selling dried up in short order.

regular trading

During regular trading yesterday, the S&P initially declined by almost a percent …before reversing course and ending the day up by 1%+.  Government bonds declined sharply.  The dollar was basically unchanged.  This happened even though earlier in the week Wall Street rallied on the idea that Hillary would win.

sector breakout

The sector pattern of trading was also revealing:

–the largest gainers, according to Google Finance, were Healthcare (+3.3%), Materials (+2.6%), Financials (+1.6%), Industrials (+1.6%) and Energy (+1.0%)

–relative losers were Utilities (-2.4%) and Staples (-1.0%).  Real estate–part of the Google Finance financials–was down by about 2%

–looking more closely at the Energy sector, big multinational integrateds rose more or less in line with the market, while smaller exploration firms and oilfield services companies (the last being the rocket fuel of the Energy sector) made more substantial upward progress.

economic underpinnings

Led by Wall Street, global markets shifted very quickly away from concern about Trump’s checkered business career and his white supremacist views.  They began instead to explore the implications of the likelihood that legislative gridlock is unlikely to continue in Washington now that one party controls both the Oval Office and both houses of Congress.

On the most general level, this likely means that Washington will approve a large infrastructure spending plan early next year.  This will have two consequences.  It will create demand for labor at a time when the country is already at full employment.  This means that wage growth, which already looks to be expanding at an increasing rate, will continue to accelerate.  At the same time, the presence of fiscal stimulus will remove some of the need for the Fed to keep interest rates at intensive-care lows.  Both aspects imply that short-term interest rates may begin to rise at a more rapid than anticipated clip.

The idea of spending on roads etc. means higher demand for basic materials and for construction machinery.  Rising rates are bad news for government bonds, and for bond-like securities such as REITs.  So, too, is the possibillity that wage-driven inflation may emerge as an issue as soon as 2017.  On the other hand, rising rates tend to be good for large banks, which were among the best performers yesterday.

In addition,

–income tax reform that lowers corporate rates (good for full-tax payers like healthcare companies) seems likely next year.  Republicans seem particularly eager to repeal/replace Obamacare, which would arguably be good for healthcare providers

–the oil and gas industry is one that has been traditionally in the Republican camp.  Trump has promised to stimulate oilfield activity.

 

Let’s see what today brings.