Market Strategy Radar Screen Weekly September 26, 2016

  The Week That Is and the Week That Was

For a second week in a row, the market digests major events.

Investors will be looking beyond the political remarks and jibes for clues as to how the candidates’ respective proposed platforms could affect the stateside economy and even the world economy, as well as what might be the cost burden and budget impact of what is proposed.

Equally important for investors will be the amount of detail provided to add clarity as to what risks and opportunities are likely to develop for the markets from all that is mentioned.

From our perspective as politically agnostic market strategists, we anticipate that this first debate will be well worth the time spent watching it.

Ahead of debate night we revisit our sector views in relation to the candidates with more detail to follow post the first debate.

In last week’s edition of this publication we outlined the sectors that we expected would benefit regardless of which of the two major candidates wins.

Those sector beneficiaries included: Industrials, Materials, Information Technology and Consumer discretionary as both Secretary Clinton and Mr. Trump have highlighted the need for significant fiscal policy to be directed toward infrastructure buildout, replacement and repair.

From what has been heard so far from both candidates it is widely expected that each would be supportive of further government investment in defense, homeland security and cyber security. Each would likely produce programs that would increase spending in these areas that should benefit the previously mentioned sectors as well.

As to health care, pricing (particularly aggressive pricing practices considered egregious) would likely increasingly come under scrutiny and pressure with either a Clinton or Trump administration in the Whitehouse.

Hearings broadcast live from Washington just last week dealing with issues currently emanating from aggressive drug pricing as well as aggressive selling practices at a financial institution likely provided a preview and perhaps the shape of things to come for those sectors (or any sector, for that matter) wherein the operations of a company or a group of companies comes under official scrutiny by elected government officials belonging to either side of the aisle.

That said, we would expect that cyclical and secular drivers will continue to broadly favor those sectors as businesses respond to the needs of their customers, clients and shareholders.

The energy sector as represented by traditional fossil fuel production and distribution would likely benefit under a Trump administration while alternative energy and environmental entities likely would benefit under a Clinton administration.

Last week’s main event

The Fed’s FOMC meeting press release last week and decision not to raise its benchmark rate did not surprise us, nor did the market’s rally in response to that decision.

While some participants in and around the market were concerned that the Fed’s tone had become more hawkish coming out of the FOMC meeting last week, we did not share that concern.

We have expected for some time this year that the Fed will raise its benchmark rate in December by 25 basis points, if only to remind the markets that the process of rate normalization is ongoing (no matter at how slow a rate) as well as to keep in check any sources of animal spirits or irrational exuberance emanating from the markets.

To us the Fed’s practice of first sending the hawks out over the landscape via previous and current Fedspeak events followed by releasing the doves in subsequent Fedspeak events and commentaries has been an effective method of delivering its message and a format used to manage the process of normalization since Ben Bernanke’s term as Fed chair.

This Fed methodology has enabled the bond market previously and currently to do for the Fed what it hasn’t done directly itself since last December–that is, to tighten credit.

We recall early May of 2013 when then Fed Chair Ben Bernanke announced that the Fed was considering tapering its monthly bond buying program. At the time of his remarks (in early May of 2013) the 10-year Treasury yield was around 1.63%.

After Mr. Bernanke’s remarks, the yield on the 10-year Treasury began to rise, pushed by market forces until it reached a high of 3.02% on December 31st of 2013.

Shortly thereafter the market appeared to recognize that it had inaccurately projected where rates were headed, worries about inflation dispersed and concerns with slowing growth took center stage in the markets. The yield on the 10-year Treasury subsequently dropped, reaching as low as 1.64% in January of 2015.

It’s worth noting that last Friday (September 23, 2016) the 10-year Treasury yield closed at 1.62%. On January 1st of this year the yield on the 10-year stood at 2.27%.

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