Integrity Competence Prudence
Chase for Performance is On
The chase for performance is on. Since this year’s presidential election there has been a meltup in the stock market and a meltdown in the bond market.
Although in a multi trillion-dollar market such as the U.S. stock market no one in real-time can know which institutions, hedge funds, or wealthy individuals are on what side of market’s daily trading, but based on his own admission we do know Carl Ichan did leave Trump’s election night party early to go and make a $1 billion dollar buy on the night of the election in the e-mini futures when they were limit down. Perhaps that buy triggered some other trend following quant funds which use algorithmic computer models to place their orders to buy more stocks in hours and days following that trade; and then it isn’t out of the roam possibilities to think those buys, triggered additional buys by other algos and/or institutions.
Following the election results there has been some positive news albeit most of them were backward looking data (e.g. 3.2% GDP for Q3 and 4.6% unemployment), so the major part of this rally so far is more than likely attributed to the ‘hope’ following the election results.
Hope that the new incoming Trump administration can immediately implement all or at least most of their stated as well as vaguely suggested “America First” economic policies/priorities all without any negative consequences. Buyers of stocks using Trumponomics are cherry-picking from positive policy impacts like infrastructure spending, reduced corporate and personal taxes, repatriation and reduced regulation and ignoring those that would create headwinds such as trade hostilities with trading partners like China, higher interest rates and the strong dollar. Needless to say, because these policy priorities have not been explicitly stated and more importantly they have not been passed into law, no one can really model what their impacts will be on the revenue and earnings of companies or for that matter on the overall economy.
But what all of these hopes have brought in has been the animal spirit into the market. Especially for active money managers that are lagging their equity benchmarks, giving them every incentive to buy stocks without regard for valuation just to catch up to their benchmarks before the year end or for portfolio dressing to show they own some of the high performing stocks albeit at higher price points.
When a buying panic occurs everyone who is anxious to buy ends up buying, especially as we near these arbitrary and meaningless round numbers like Dow 20,000. Moreover, because of potential capital gains tax rate changes in 2017 there is also an absence of sellers as they are holding off on selling until the new year.
Looking at market returns for past presidential cycles when a new president from a different party comes into power (granted there aren't that many data points) both that past market performance indicator as well as using the rational of reversion to the mean would suggest that this rally probably will last until inauguration or at most just a month or so after it; and then there should be a downward trend in the market as we move from campaign promises to actual governing. Which will bode well for anyone with cash to use any dip or market selloffs to increase exposure to various stocks, sectors and asset classes that are reasonably priced.