S&P Hits 6000

Yay! The election is over! Hopefully, I’ll now stop getting bombarded with spam emails, texts and calls. I can transfer my annoyance to my wife’s desire to listen to Christmas music 4 weeks too soon.

I don’t enjoy writing about politics because everyone’s views are so personal. It’s hard to strike the right tone. But, elections affect markets, at least in the near-term so I thought it would be helpful to explain my view on how the markets are interpreting the outcome.

The first thing the markets liked was the finality. We got an outcome on election night. Yippie! In fact, for all the handwringing about the volatility around this election, we got very little. The markets all year have remained quite calm.

The first thing the markets liked was the finality.

On Wednesday, we got a big bounce in the stock market. The move was strong all-around but especially so in some of the areas that had been underperforming—like the stocks of smaller companies that make up the Russell 2000 index.

The surge pushed the S&P 500 on the brink of 6000.

Why the move?

Why the move?

A few reasons come to mind. First, the betting markets seem to think Donald Trump was going to win in the weeks leading up to the election. So, his victory wasn’t a total surprise to markets.

But, there seemed to be less of a chance of a clean sweep–the Republicans could also take both chambers of Congress. While the final tally on the House of Representatives is still being sorted out, the common belief is that the G.O.P. will ultimately remain in control. Couple that with a majority in the Senate and Trump in the White House, and the markets believe we’re on the doorsteps of a pro-growth, pro-merger, less regulation agenda.

And those 2017 tax cuts that expire next year? They are far more likely to get extended, which would boost corporate profits.

And those 2017 tax cuts that expire next year?

Furthermore, small caps may have rallied given Trump’s stance on immigration and trade, Tariffs would likely help boost profits for smaller companies that sell primarily in the U.S.

But, as with any policy, there is the potential for unintended consequences. One of the main consequences might be inflation. Widening tariffs could drive up prices on goods as U.S.-based companies would have greater ability to charge more.

Tightening immigration may lessen the strain on some cities and states tight on resources. It may also create labor shortages that could drive up wages, then ultimately consumer prices.

Tightening immigration may lessen the strain on some cities and states tight on resources.

For the moment, the market is focused on the positive aspects of Trump’s return. That’s probably to be expected. It’s far too soon to know what the exact policies will look like or how they’ll ultimately impact the economy.

However, as an investor, it’s helpful to also consider the negative impacts.. Remember, the markets are forward looking. They make projections, then see if those projections hold up. If they don’t, the market may reverse course.

This is why it’s important not to get sucked into the surge. Stay disciplined to your level of risk and what’s best to achieve your goals.

This is why it’s important not to get sucked into the surge.

Now to the Federal Reserve, which cut rates another ¼ point this week.

They had telegraphed the move for weeks so they needed to deliver on their promise. Chairman Jay Powell said the committee still believes interest rates needed to come down to avoid slowing down the economy too much. He feels policymakers are well on their way to restoring long-term price stability.

But, the path forward on rates looks less certain. If the economy continues to chug along, fewer rate cuts may be necessary.

But, the path forward on rates looks less certain.

The long-term level of interest rates is something the market is constantly grappling with, but especially now. We were in a ultra-low interest rate environment since the Great Financial Crisis. Even now as rates have moved higher, there’s an open question as to where they’ll hover over the longer-term.

Are we going to stay in a 4-5% world?

Are we going higher?

Are we going higher?

Or will policymakers slam them back to the floor the next time the economy is in trouble?

So far, the market does not seem to be worried long-term rates are going to skyrocket into the 5’s for any extended period of time.

That’s one reason the stock market continues to feel relaxed and able climb higher.

That’s one reason the stock market continues to feel relaxed and able climb higher.

What’s your take? Please leave a comment.

This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC.