We wanted to reach out to clients and friends of JoycePayne Partners following Tuesday’s presidential election. While we were surprised by Trump’s win (which we viewed as having a low probability but not impossible), we think that the election will only have a short-term impact on the markets.
Since the markets dislike uncertainty, many predicted the Dow would tank following the unexpected election outcome. Indeed, the futures market on the Dow Jones Industrial Average plunged by 900 points overnight on Tuesday when Trump reached 270 electoral votes. Instead, we saw record highs yesterday. In particular, financial and pharmaceutical stocks have posted strong gains based on the perception that regulatory burdens in those industries will lessen in a Trump administration.
One can opine that the cooperative manner in which Donald Trump and President Obama have interacted thus far following Tuesday’s unforeseen election result indicates that the transition of power will be smoother than some anticipated. And this could dampen volatility.
It is our belief that political elections have less market impact – whether good or bad – than most people believe they will. At the end of the day, fundamental economic factors will have a more meaningful impact on your portfolio.
What we believe will have the most significant effect on the financial markets going forward is the direction of interest rates. The yield on the benchmark ten-year Treasury note was a little over 1.5% at the beginning of October. That rate is considerably lower than the 2.1% dividend yield on the S&P 500 index. Indeed, over 2/3 of the stocks in the S&P 500 have a higher dividend yield than the yield on a ten-year Treasury note. Low interest rates are providing substantial support for the markets. However, the yield on a ten-year Treasury note has moved up since the beginning of October and jumped to 2.14% since Trump’s victory. We will certainly be keeping an eye on this upward trend. If interest rates go up more than expected, stocks and other risk assets will be less attractive relative to less risky, interest-bearing investments.
Please contact your financial strategist or me with any questions.
Michael Joyce, CFA, CFP