Market Strategy Radar Screen Weekly November 09, 2016

  There’s Got to Be a Morning After

Like many of our fellow Americans, we poured the coffee strong this morning after staying up into the early morning watching the election returns that led to President-Elect Donald Trump’s acceptance speech shortly after 3am.

Our first thought as to the outcome of last night’s election was that professional polling as we have known it will likely never be the same. First it was Brexit in June and now with the US presidential election that respected and well-known pollsters broadly failed to capture an accurate read on just what the voting public’s opinion really was. In market parlance, “Talk about a big miss.”

What happened?

Was it bad “algos” (algorithms) or simply bad tea leaf readings that caused the pollsters to get it so wrong? Either way, it’s back to the drawing board for the pollsters if they are to regain their former perch of prominence in the process of calling an election.

We believe what happened this time around was that candidate Trump had over the course of the election process been so vilified (albeit at times brought upon by his own actions) in traditional media as well as in social media that Mr. Trump’s supporters were often reluctant to tell pollsters whom they planned to vote for.

We can also imagine that many of those who turned out for Mr. Trump on election night had simply not come up on pollsters’ radar screens as “likely voters.”

As a result, pollsters were probably much of the time operating in the dark when it came to Donald Trump’s chances of winning.

In our recent travels (we have been on the road almost endlessly since September traveling to client events and company meetings throughout the country), we had noticed that Trump supporters (including clients, advisors, as well as individuals unrelated to our business travel) had with increasing frequency as election day grew nearer revealed to us in unsolicited fashion and usually on a one-to-one basis and with considerable enthusiasm that they were planning to vote for Mr. Trump.

This unsolicited sampling of opinion being primarily anecdotal and not driven by pollster professionalism we took as happenstance rather than powerfully material. The lesson for those of us who were surprised by yesterday’s election outcome might well be to never underestimate the power of a grass roots movement.

Beyond that we add that when real show business stands toe to toe with traditional politics in a standoff in the proverbial O.K. Corral, it can be wise to put your money on show biz (anyone remember Ronald Reagan?).

What now?

Already in his acceptance speech in the wee hours of the morning President-Elect Trump began to release the proverbial flock of doves of amelioration to those whose candidate lost. Stunned Democrats can pick themselves up and move forward knowing that an olive branch has been extended their way. The election is indeed over.

The old guard of the Republican party, which had to some extent abandoned Trump by the last days of the campaign (even to the extent that they had staged their respective election-night parties in venues away from the Trump campaign), might begin to realize that the Republican Party of the last ten years or so is thought by a large part of the electorate to be about as fresh as yesterday’s newspapers.

As to the markets?

The initial downside drama that unfolded on election night in the futures markets as a Trump victory became a reality was quickly digested and ameliorated as bets were right-sized and earlier trades positioned for Democratic victory expected just hours before were unwound. As the day unfolded the pullback that was felt in Asia morphed into a rally in Europe and stateside as the world turned on its axis.

As we had pondered earlier, the market’s machinations from Friday, October 28th, to Friday, November 4th, appeared to have served as a dress rehearsal in what came to pass, as prospects of a near-certain Clinton victory faded into
the reality of Mr. Trump’s late momentum.

Rallies by stocks in the Financials, Health Care and Energy sectors, which had been considered at risk in the event of a Clinton victory, suggest a likely change of fate under a Trump administration.

Prospects for a reduction rather than increase of regulations, an opportunity to see tax cuts for individuals and businesses (including the likelihood of an incentive for US multinational corporations to return profits stateside that were earned abroad) could improve the outlook for business, employment, and the overall US economy.

Admittedly, it’s a long distance between an idea, structuring a solution, and its successful execution─ but the wheels are in motion now.

Prior to Election Day we had thought that either party’s plans for infrastructure would be good for stocks in the Materials, Industrials, Consumer Discretionary and Information Technology sectors. The Trump victory supports our earlier thoughts and favors those sectors.

We also expect his election will be a positive for Financials, Health Care and Energy (though Energy will remain under pressure via technological advances, which make supply plentiful, as well as efficiency gains in business and consumer use).

As to the Risks?

Internationally President-Elect Trump has to communicate his message more diplomatically and in greater detail. That said, the rallies in Europe and the overall moderate losses in Asia and in Latin America on Wednesday indicate to us that there is considerable hope for negotiation to navigate what lies ahead in addressing global trade with those regions.

The Federal Reserve, we continue to believe, will likely raise rates in December so long as the economic data continue to support that action.

Some nervousness about previous remarks by the President-Elect about the leadership of the Fed is warranted, but could ease in the days ahead with the process of communication and transition forthcoming.

As Donald Trump and family exited the stage after his acceptance speech last night, the music of the Rolling Stones called out the lyrics:

You can't always get what you want But if you try sometimes well you just might find; You get what you need.

The market at least for today appears to agree.

In the weeks ahead perhaps the new theme will become Sly and the Family Stone’s classic, We got to live together.

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