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Here's why stocks have been on a tear since Trump's election
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Stocks
are on a tear, and the US dollar is rising - all since Donald
Trump was elected the 45th US president.
A month after the election, we've taken a closer look at how
markets have moved since then as well as some idea of why those
moves have happened.
We put together a collection of charts illustrating some of the
biggest moves in the weeks since Election Day.
For the charts showing corporate stocks, a red line on the chart
indicates closing time on Election Day.
For yields, currencies, and gold, which see extensive overnight
trading, the line shows midnight of November 9, around which time
it became clear that Trump would win the election.
Stocks have climbed to a record, but ...
On election night, as the results started indicating an
increasing likelihood of a Trump victory,
markets went haywire. Near midnight, futures for the
benchmark S&P 500 and Dow Jones Industrial Average indexes
fell by over 4%.
Stocks often tumble during unexpected and surprising moments,
like Trump's late-night victory and, earlier in 2016,
the Brexit referendum.
The chart, however, illustrates only moves during the regular
trading day (as do the following charts of stock prices), and so
it doesn't include the wild ride from the night of November 8.
Instead it shows how quickly stock markets recovered, as
investors focused on assumptions that are good for the market
instead of uncertainty.
All of the major US indexes have set
all-time highs. As the next charts will show, certain sectors
have been big winners since the election, while others have not
fared as well.
... to understand why, it is important to look at specific sectors. Bank stocks, for example, have staged a huge rally that seems directly related to assumptions about Trump's policy.
The
financial sector has taken off since the election, on the
assumption that a Republican administration will foster a
much more lenient regulatory environment than has been in
place since the financial crisis. As we will see later, interest
rates have also gone up since the election, and higher rates
could benefit banks.
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In particular, Goldman Sachs — a previous employer of several key Trump advisers — has been on a tear.
It's worth noting that Trump's chief strategist, Steve Bannon,
and his nominee for Treasury secretary, Steve Mnuchin, are
Goldman Sachs alumni, and
on Friday it was widely reported that Trump intended to name
Goldman chief operating officer and president Gary Cohn as the
head of the National Economic Council.
At least that was the assumption driving gains at first. But then
one prominent drug-company CEO recently noted that drug prices
were
a populist issue, which means investors may be getting ahead
of themselves if they think Trump will leave the companies alone.
Days later, Time magazine published an interview with Trump in
which he said he was "going to bring down drug prices."
The sharp drop-off you see near the right side of the chart is
what happened next.
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Some much narrower themes are also at play. For example, for-profit higher-education companies like Apollo Education have rallied on news of a new administration.
The Obama administration cracked down on for-profit higher
education, including
Department of Education sanctions against the for-profit
college ITT that eventually led that company to cease operations
and
file for bankruptcy. Markets appear to be betting that Trump
will be more lenient toward for-profit colleges.
Betsy DeVos,
Trump's pick for education secretary, is a longtime supporter
of school vouchers, or government subsidies for families to send
their children to private and charter schools rather than
traditional public schools. It will be interesting to see how her
Education Department handles for-profit colleges.
CoreCivic,
formerly the Corrections Corporation of America, is the largest
private prison company in the US. The
company's stock soared the day after the election.
Private prisons have come under fire from Democrats and the
outgoing administration. Markets could be pricing in the
likelihood of Trump undoing the Obama administration's decision
to
phase out private prisons for federal inmates.
Other likely Trump policies could also be potential boons for the
prison industry. Trump
ran as a "law and order" candidate throughout the campaign,
suggesting the possibility of a crackdown on crime in his
administration, adding demand for prison beds.
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Trump isn't seen as good news for everyone, though. His plan to unravel Obamacare has hit some healthcare stocks, like Hospital Corporation of America, hard.
With Obamacare
unlikely to survive in its present form under a Trump
administration, the future health insurance of some 20 million
Americans is uncertain. If Congress and the incoming president
roll back the Affordable Care Act's subsidized individual
insurance exchanges and Medicaid expansion, many of those 20
million Americans insured under those provisions could lose
coverage.
All this buying has left stocks historically expensive relative to their underlying values.
The Shiller price-to-earnings ratio is a commonly used measure of
how expensive stocks are relative to their underlying values. It
shows the ratio of S&P 500 companies' stock prices to their
earnings, after adjusting for macroeconomic factors.
As of Friday, the ratio hit 27.86, and
the only times it has been higher were right before the 1929
crash, the dot-com bubble of the late 1990s, and the run-up to
the 2008 financial crisis.
Of course, high valuations don't necessarily mean a crash is
imminent, but stocks have certainly gotten very pricey lately.
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Moving to the bond market, Treasury yields tumbled briefly on election night before ratcheting up over the following weeks.
Here's another way of looking at investors expectations on inflation.
The
10-year breakeven inflation rate, which is based on comparing
yields from regular 10-year Treasurys and inflation-protected
Treasurys, gives a sense of what the market thinks inflation will
look like over the coming years, and it has been mostly on the
rise in the month after the election.
As mentioned on the last chart, Trump's proposed fiscal stimulus
could lead to more inflation. Meanwhile, restrictive trade
policies that make imported goods more expensive for American
consumers and a crackdown on immigration leading to a possible
labor shortage would most likely also lead to higher inflation,
while not doing much for economic growth.
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Foreign-exchange markets have had their share of drama, too. One of the big stories has been the Mexican peso.
On election night,
the peso crashed to a record low as the results came in. The
Mexican currency has since remained much lower than before the
election.
Throughout the campaign, the peso acted as
a sort of barometer of Trump's chances: Events that made
Trump more likely to win caused the peso to fall; situations that
favored Clinton strengthened the currency. Investors seem to be
betting that Trump's plans to restrict trade and immigration
could damage Mexico's economy.
Trump's fiscal policy could
push the dollar higher owing to the potential economic growth and
inflation that could result from a big stimulus push.
The bank's analysts also noted
that proposals to encourage companies holding money overseas
to
bring those profits back home could also be a boon if the overseas money
is in a foreign currency that would need to be converted back
into dollars.
More restrictive trade policy
would have an "ambiguous" effect on the dollar against other
developed market currencies, but could strengthen the currency
against emerging markets that would have a harder time exporting
to the US.
Finally, HSBC noted that a more
restrictive immigration policy could threaten US economic growth,
weakening the dollar.
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Gold spiked on election night but has steadily tumbled since.
In the weeks after the election, however, the metal has slumped.
As noted in earlier charts, investors are optimistic that the
president-elect's proposed fiscal policies could jump-start
growth,
making other investments much more attractive.
Gold is also often used as a hedge against inflation, and so it's
possible, should inflation emerge or geopolitical uncertainty
increase under the 45th president, that gold
could turn around and dramatically rally.
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