The most divisive and chaotic Presidential election campaign in recent memory is now over. Donald Trump emerged as the victor and now the markets must digest the news. Here are my impressions and analysis of what investors could expect moving forward.
Conventional wisdom was that Hillary Clinton would be the 45th President and that at least one house in the Congress would remain in Republican hands. Many investors have felt comfortable with a divided government.
It was predicted that if Donald Trump won the election, the stock markets would move violently lower. On the night of the election, as the results poured in and it looked more likely that Donald Trump had a chance of winning, the stock market futures sold off in excess of 850 points! As this possibility became a reality, the markets started to determine winners and losers of a Trump presidency.
Cause for Optimism?
There was already some optimism built into the stock market outlook for 2017. The Standard & Poor’s 500 Index (S&P 500 Index) has had declining earnings for the past five quarters in a row. The Earnings Per Share growth (loss) for 2016 is estimated to be -0.2%, which is disappointing, but reflects the nagging drag energy has had. Upcoming 2017 is anticipated to be a different story. The consensus view points to a recovery of 6.1% in earnings with robust revenue growth because of higher wages, low gas prices and personal wealth gains (largely from the stock and housing markets). (Zacks Investment Management Newsletter, November 9, 2016)
However, there seems to be more optimism about the potential for even faster growth in the economy. This perception results from the view that there will be greater spending on infrastructure, lower tax rates, less regulation and, in general, a more business-friendly climate. That can be offset, in part, by the fear of a disruption in foreign trade resulting from challenging established trade agreements and a tougher stance on immigration.
The following is a list of sectors that can be affected by a Trump Presidency and a Republican Congress.
Energy – Expect fewer regulations for big oil companies and reduced subsidies for alternative energy. I expect more permits for development on federal lands, more drilling, more pipelines, and more coal, which could also benefit some railroad companies. However, some of the energy stocks may not perform as well because the potential additional supply could cause the price of oil to go down and stay down for an extended period of time.
Financials – There has been a very strong rally in this sector as soon as it was announced that Trump won the presidential election. He has promised to freeze new financial regulations and roll back some of the older ones including the controversial Dodd-Frank Act. This would likely favor smaller banks, which would benefit more from reduced regulatory costs. In addition, if interest rates move higher (see below), banks will enjoy higher net margin interest, which is crucial to their profitability.
Manufacturing – This will be an interesting sector to watch. On the one hand, manufacturing could be hurt with Trump’s tough talk on trade, including tariffs (particularly on imports from China) and tearing up NAFTA. It could be just tough talk and the start of a negotiation. On the other hand, lower energy prices could help manufacturing companies reduce costs.
Infrastructure – Most people agree that America needs to revitalize its ailing infrastructure. I expect big spending in this area. This would probably lead to more jobs, faster economic growth and a higher deficit, which could lead to higher interest rates. Trump has mentioned that he would have companies invest their own money to fund some of these projects, which would lead these companies to charge the users (i.e., toll roads) so the projects wouldn’t be all funded by the government.
Health Care – Trump wants to repeal the Affordable Care Act and allow individuals to buy policies directly from insurers that would likely be cheaper, but may not provide equally complete coverage. A centerpiece of his plan is allowing insurers to sell policies across state lines to promote competition. Fewer restrictions may bode well for health care and pharmaceutical companies.
Technology – These are worldwide companies. Since the election this sector has sold off for three reasons:
Bonds – Interest rates have risen fairly dramatically since the election. One could say it was a knee-jerk reaction to an unexpected result. The bond market has quickly re-priced bonds to reflect a new reality. It appears that the new President and Congress will agree to new fiscal measures that will complement monetary policy and fuel more growth in the economy. The consensus view is that this will in turn fuel inflation and, hence, higher interest rates. This is bad for bonds that are interest rate sensitive, such as longer-dated Treasuries or high-quality corporate bonds (although in time this will be better for savers).
The level of optimism in the markets is surprising given the derision Trump faced from Wall Street and the U.S. Chamber of Commerce during the election. While markets have initially rallied, we will be measured in our approach and take our time to review potential opportunities as well as areas to avoid. When we make recommendations to adjust, where appropriate, they will be based not on knee-jerk reactions but on the expected fundamentals going forward.
Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The S&P 500 is an unmanaged index of 500 widely held stocks. Investors cannot invest directly in an index. The S&P 500 is an unmanaged index of 500 widely held stocks.
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David Urovsky is a registered representative of Lincoln Financial Advisors Corp. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. Wealth Advisors Group is not an affiliate of Lincoln Financial Advisors Corp. CRN-1658535-120716
By David Urovosky
You may have recently seen or read news stories about the trend overseas toward central banks attempting to stimulate their countries’ economies by reducing loan interest rates to below zero percent. The European Central Bank (ECB) has already embraced negative yields, and the Bank of Japan is the most recent entrant into this controversial phenomena.
In layman’s terms, here is what you need to know about this trend and how it may affect your financial investments in the future:
What is a negative interest rate?
Negative interest rates are interest rates that are actually below zero. A depositor would actually have to pay money to the bank for keeping it there. In effect, the depositor is paying the bank to save their money.
This is how it theoretically works: If you deposited $10,000 in your bank you may only receive $9,990 after a year—with no interest paid in between. That means savers won’t get all of their money back. You may ask “Why would I do that?” As long as the rates were not too low or not too negative, you may keep it there and “pay the fee” for safety or convenience.
It seems counterintuitive that people would pay a bank or financial institution to save money. What is happening in the economy and financial markets in Europe and Japan that would make this option attractive to depositors?
This is not an attractive option for depositors. The Central Banks in Europe, Denmark, Sweden, Switzerland, and Japan are now charging commercial banks for their excess reserves. According to Bloombergview.com (January 29, 2016), negative interest rates actually punish banks that hoard cash instead of extending loans to businesses or to weaker lenders. They have not started charging retail customers (yet) for fear of losing deposits. By the end of 2015, about a third of debt issued by euro zone governments had negative yields. That means investors holding bonds to maturity won’t get all of their money back.
There are several potential explanations for the emergence of negative yields, particularly those on the short end of the yield curve. These include very low inflation, the persistence of the international savings glut and “flight to safety” toward low-risk, fixed-income assets.
In consequence, sovereign bonds of certain countries in Europe that are deemed low-risk have been in heavy demand. In addition, The ECB has exacerbated the demand for these bonds by implementing the Extended Asset Purchase Program (their version of quantitative easing — stimulating the economy by increasing funds in the monetary system). The ECB is purchasing $60 billion of these bonds every month until at least September of 2016 for a total of $1.6 trillion euros. This and other factors have caused a shortage of these bonds, which has driven up the price and knocked down the yields into negative territory.
What is the likelihood that American banks and other financial institutions could start charging depositors to hold their money?
Most banks have not passed on this cost to their retail customers for fear of losing deposits. However, this policy does cost the banks money and hurts profits. The banks have tried to cover some of this cost by implementing various fees. Some commercial banks, such as Julius Baer and JP Morgan, have started to charge their largest corporate customers who carry tens of millions of dollars with the banks. In effect, they are telling these larger customers to take their money elsewhere!
For the average individual investor, what are the plusses and minuses of negative interest rates?
The big plus is that is that interest rates for loans of all types—mortgages, car loans etc.,— will be lower for a longer period of time. It will be a great time for borrowers. The same holds true for our government. With $19 trillion in debt, interest rates will remain low and our deficit will not increase at blinding speed. Businesses will be able to borrow at lower rates and expand. Companies will be able to borrow cheaply and either expand or buy back their stock (such as Apple and many other companies).
The minuses of negative interest rates are two-fold. It is bad for savers and that affects a lot of retired people. It may have a cost to keep money in the bank. The second is behavioral. If interest rates were only slightly negative, it may not change behavior very much. Depositors would still leave money in the bank for safety and convenience. But negative rates crossing that threshold (some analysts say at 0.5% negative) could change behavior. How?
None of these tactics are good for the economy. The economy is based on confidence and we need money in the system to be “out there” changing hands, and making purchases. In his February 13, 2016 article “Negative 0.5% Interest Rate: Why People are Paying to Save” in the New York Times, financial reporter Neil Irwin muses, “Might new businesses sprout up that allow people to securely store thousands of bundles of $100 bills, or could people buy physical objects as stores of value that banks can’t charge a negative interest rate on?” In Japan, where rates have been very low to non- existent and now negative for a long time, many people buy safes to keep in the house. Maybe we should start looking for companies that manufacture safes as an investment?
What are the spinoff implications of negative interest rates for other financial market sectors?
For countries that have implemented negative rates, it may help boost their exports by encouraging currency depreciation and may support lending and domestic demand by further easing credit conditions. At the same time, they could also have some adverse consequences for financial stability through an erosion of bank profitability and through excessive risk taking by investors seeking a higher yield (as mentioned in my last quarterly report).
Potential implications for developing countries include a search for yield supporting capital inflows (for example, U.S. treasury bonds would become a very attractive investment compared to the bonds in sovereign debt of Europe because the treasuries are high yielding and the dollar would increase in value as compared to the euro), which could help offset the impact of an approaching liftoff in U.S. policy interest rates.
As far as currency goes, if our interest rates are higher than Europe and Japan (which they are now), investors searching for yield will buy these bonds. They are attractive. They are priced in U.S. dollars, so theoretically the dollar will go up in value as compared to the euro and the yen. This will make U.S. products more expensive around the world and will hurt sales and earnings of the large U.S. companies that have a lot of international sales. That is one reason the stock market took a big hit when Janet Yellen announced the first interest rate hike in almost 10 years in December 2015. Much of the rest of the world is lowering rates as we have started to hike rates. That hurts our multinational companies earnings and profits and share prices.
Your key takeaways:
I don’t think we will have negative rates in the United States this year; however, negative interest policy is spreading in the rest of the world. David Kotok, the Chairman and Chief Investment Officer of Cumberland Advisors said, “Five currencies and 23 countries are now practicing some form of negative interest rate policy (NIRP). In all cases the likely outlook is for NIRP to go lower in rate and for its usage to broaden. For perspective, 24% of the world’s real output is housed in those 23 countries ranging in size from Malta (the world’s smallest economy) to Japan (the world’s third-largest economy).”
I expect interest rates in the U.S. to remain low for a long time, perhaps 3 to 5 years. Investors will continue to search for yield and, with a lack of other choices, I think money (in fits and starts) will find its way to the stock market and other risk assets and drive prices of credit-sensitive bonds and stocks higher during the next few years.
Questions or comments? Send us an email at David.Urovsky@lfg.com.
The information in this blog post has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of David A. Urovsky, President of Wealth Advisors Group, and are not necessarily those of Lincoln Financial Advisors. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for all investors. Investing involves risk, and investors may incur a profit or loss.
David Urovsky is registered representative of Lincoln Financial Advisors Corp. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer, Member (SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. It is not our position to offer legal or tax advice. Wealth Advisors Group is not an affiliate of Lincoln Financial Advisors Corp. CRN-1468262-041116