November 17, 2016

We finally have the volatility and higher rates that this market has been craving for some time. Yes, those higher rates are going to translate into lower portfolio valuations, but it also translates into much better opportunities when deploying capital. Also, while I would expect the volatility of the last week to continue going forward, the market has already begun to settle in a bit.

Obviously, as the world already knows, Donald Trump won the presidential election fairly handedly due to winning over key voters in a handful of swing states, including North Carolina, Florida, Wisconsin, Iowa, Pennsylvania, and Michigan. Stock markets signaled his victory long before the Electoral College though, with the Dow down over 900 points by 10pm on election night. Markets had been drifting slowly higher leading up to the vote, under the assumption that Hillary had all but won the election already. The big surprise however, was that the massive drop was entirely reversed, and the Dow closed up nearly 300 points on Wednesday. The move represented a 1200 point swing in less than 24 hours.

Now, in the wake of the election, stocks have continued to drift higher as bond prices have moved dramatically lower on speculation that Trump’s presidency will bring lower taxes, increased infrastructure spending, increased military spending, and higher inflation. Today, the 10-year treasury rate is at 2.25%, which is 45 bps higher that it was 10 days ago.

On the economic front, jobless claims this morning were the lowest reported in over 40 years. At 235,000 claims, that represents a drop of 19,000 from last week. Additionally, claims have been below 300,000 for 89 straight weeks, which is the longest streak since 1970. Strength in employment numbers can be attributed to the continued expansion in the economy. Also, inflation has bene ticking upward slightly in recent months, giving additional fuel to the argument for a rate increase by the Fed in December. Janet Yellen spoke this morning and reiterated that a rate increase could be appropriate relatively soon if the economic data continues as it has been trending.

At this point, we still expect a 25 bps rate increase in December, and will be watching closely the developments surrounding Trump’s presidency, and the final employment report on December 2nd before the FOMC meets in December to discuss a rate increase.

Eric Swanson, CFA