In light of the recent election events, we wanted to update our clients to provide some information and clarity on the election impact, along with a number of other factors affecting the market. While the election results were certainly unexpected, there are a number of other factors currently driving the market, and will continue to do so through the 4th quarter and into 2017. Factors such as the probability of future rate hikes, the overall health of the US economy, and continued uncertainty in the Eurozone.
First and foremost, concerns regarding the election results will continue to impact markets for the next few months as investors digest new information regarding the details and implementation of the new administration’s policy initiatives. While the market will likely remain volatile during this period of “discovery,” the actual impact of policy changes will not likely be felt in the economy for a number of years. The chart to the right shows that historically volatility has remained in the market after the end of the election. While volatility certainly creates fear and uncertainty, the key point to remember is that the total returns during, and after, periods of volatility are important to the overall success of a long-term portfolio. As your advisor, we want to refrain from making emotional decisions and taking action before all of the facts are available.
Another event weighing on markets, likely more significant than the election, is the Federal Reserve meeting on December 14th. Beyond this, the possibility for additional rate hikes and the continued Fed tightening path place a constant pressure on the markets. Historically, interest rate hikes have been used to “cool-off” the economy and equity markets. Currently, the Fed’s policy remains exceedingly accommodative compared to historical levels, and the Fed has stressed that rate hikes will be gradual and drawn-out. In fact, since the Fed hiked rates in December of 2015 by .25%, there have been no additional rate hikes, despite projections to the contrary at the end of 2015. While the stated goal of the Fed is to raise interest rates over the coming years, they have reiterated that each hike will be dependent upon positive economic data. Clearly, the Federal Reserve is trying to avoid significantly impacting the equity markets with the rate hikes. Our team is closely reviewing each Federal Reserve meeting release for indications of future rate hike projections that could impact your portfolio, in conjunction with the other market factors
The Current State
This brings us to the current state of the US Markets. While the country has had one of the weakest recoveries on record, caused by the lasting impact of the ’08 crisis and slowing global growth, recent numbers do not forecast significant economic issues domestically. The following charts show relative strength in both corporate earnings (considering energy earnings) and the Index of Leading Economic Indicators (LEI Index). These numbers show a US economy that is growing at a slow, but steady pace; and, while short-term market volatility can create fear and uncertainty, the overall health of the economy is more critical for the long-term direction of the market.
S&P 500 Earnings Per Share
Leading Economic Indicators
The final major concern affecting markets both in the US and abroad is the uncertainty on the future of the EU and Britain surrounding the “Brexit” vote. On June 23rd, British citizens voted to leave the EU due to concerns regarding immigration and control over EU policy, among other issues. This shift, while certainly important on its own, has significant implications for the future of the EU as a whole. The finalization of the exit from the EU will not likely take effect for more than a year, but already the investment by British companies has slowed as uncertainty abounds regarding the future of trade with countries around the world. More importantly, the success of the “Brexit” campaign has fueled nationalistic parties across Europe. Most recently, Italy announced a constitutional referendum for December 4th to decide whether to make some constitutional changes. Importantly, the Italian Prime Minister has promised to resign if the vote fails, and polls currently show the vote essentially tied. Failure of the referendum would likely result in a change in government in Italy, a change that could see a nationalistic government focused on leaving the EU. Throughout the EU, parties like the National Front in France and Podemos in Spain have been gaining support with their message of protectionism and renegotiation of the EU treaty in the midst of high unemployment, weak economic growth, and debt crises in countries like Greece and Italy. Due to this swell of anti-EU support, investors globally are concerned and closely monitoring the success of local elections for these nationalist parties. The EU, as a whole, is the largest united economic body in the world and significant negative developments in this area could have global implications.
In summary, there are a number of factors, including the US election, that impact US and International Equity markets, both positively and negatively. While the election surprise certainly made headlines, there are a number of issues that are more likely to determine the trajectory of the market over the next year. While investing during any time period involves necessary risks and uncertainty, TCG made two shifts to position more conservatively over the past year in anticipation of heightened volatility and risk. As your advisor, we can apply our methodical, disciplined process to closely monitor the potential impact to your portfolio of these and other developing risk and opportunity factors, and will take appropriate action where necessary.
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