Articles tagged with: rally

The Intriguing Post-Election Rally

Why did some sectors rise more than others?

Wall Street likes certainty. When startling financial, political, or societal events occur, volatility usually follows, and the major indices may fall.

In late October, the Dow Jones Industrial Average went on a multi-day losing streak as Donald Trump caught up to Hillary Clinton in the polls tracking the presidential race. Wall Street had been anticipating a Clinton victory; suddenly, that looked less certain. The Dow gradually sank below 18,000. When Trump won, however, the Dow did not drop further. It rallied for seven days and notched four record closes.1,2

What sparked the Dow’s rally? One, a new presumption of massive federal spending on infrastructure and defense. In August, Trump pledged he would “at least double” Clinton’s proposed federal stimulus if elected, which would mean committing more than $500 billion to repair the nation’s highways, bridges, and ports. He has also talked of greater military spending. Many, if not all, of the 30 companies making up the Dow could play significant roles in such efforts. Two, a Trump presidency is perceived as pro-business, with the potential for decreased regulation, renegotiated trade agreements, and tax cuts.2,3

The small caps also soared after Trump’s win. The Russell 2000 advanced 9% during November 9-17, leading some investors to wonder what the small caps had in common with the record-setting blue chips. The quick answer is that these small-cap firms have greater exposure to the U.S. economy than they do to foreign economies. Bulls believe that these firms will be particularly well positioned if infrastructure spending increases.4

Why did the S&P 500 & Nasdaq Composite lag the Dow & the Russell? The S&P rose 1.8% from November 9-17. This returned the index to the level at which it had been for most of the third quarter.4,5

A closer look at the S&P’s recent performance reveals a striking gap between its industry groups. Its financial sector climbed 10% in the eight days after Trump’s victory, aided by hopes for friendlier bank regulation in the new administration. By November 15, its YTD performance was 17% better than that of the S&P’s worst-performing sector, utilities. This degree of difference had not been seen in the index since 2009. Basically, a major rotation happened, taking invested assets out of certain sectors and into other sectors presumed to benefit from the policies of a Trump presidency.2,6

Hearing about the Dow’s surge, some investors assumed their portfolios would see large, abrupt gains – but in any sector rotation, money flows away from some industry groups toward others. In the three days after Trump’s victory, the Dow had gained 2.81%; the S&P, 1.16%; and the Nasdaq, 0.84%. While the Dow is only comprised of 30 companies, the S&P and the Nasdaq are much broader benchmarks, exponentially larger in their scope. Both the Nasdaq and the S&P contain many tech companies – and, broadly speaking, Silicon Valley was not high on Trump.7

Investors scratching their heads at recent portfolio performance would also do well to remember that large caps are just one of six asset classes. The gains for U.S. equities stood out globally after the election; there were losses in emerging and developed markets abroad, and losses in the debt markets. As assets in many portfolios are allocated across various asset classes to try and manage risk, this helps to explain why many retail investors saw only small gains or no gains at all immediately after November 8. They were not invested merely in the member firms of the Dow Jones Industrial Average.7

Will this rally continue? It’s difficult to say. As you know, history provides information of the past, and no assurance of future returns. While it’s possible that the new administration’s policies will bear out this goodwill, it’s also possible, after the administration convenes, that there is a new perspective. Time will tell.

Mike Moffitt may be reached at  ph# 641-782-5577 or email:  mikem@cfgiowa.com

Website:  www.cfgiowa.com    

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.

The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.

The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.

The prices of small and mid-cap stocks are generally more volatile than large cap stocks.

Additionally, the prices of small cap stocks are generally more volatile than large cap stocks.

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a egistered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial. 

Citations.

1 – money.cnn.com/data/markets/dow/ [11/17/16]

2 – investing.com/news/stock-market-news/s-amp;p,-nasdaq-higher-as-investors-digest-yellen-remarks-441723 [11/17/16]

3 – fortune.com/2016/08/03/donald-trump-infrastructure/ [8/3/16]

4 – blogs.wsj.com/moneybeat/2016/11/17/why-the-small-cap-rally-may-stick-around/ [11/17/16]

5 – marketwatch.com/story/stop-calling-stock-market-rise-a-trump-rally-2016-11-17 [11/17/16]

6 – bloomberg.com/news/articles/2016-11-15/s-p-500-futures-inch-ahead-as-investors-speculate-on-trump-plans [11/15/16]

7 – forbes.com/sites/davidmarotta/2016/11/14/how-the-markets-moved-after-a-trump-victory/ [11/14/16]

 

 

The Strong Dollar: Good or Bad?

What is dollar strength and who invests in it?

You may have heard that the dollar is “strong” right now. You may have also heard that a strong dollar amounts to a headwind against commodities and stocks.

While there is some truth to that, there is more to the story. A strong dollar does not necessarily rein in the bulls, and dollar strength can work for the economy and the markets.

The U.S. Dollar Index has soared lately. Across July 2014-February 2015, the USDX (which measures the value of the greenback against key foreign currencies) rose an eyebrow-raising 19.44%.1

On March 9, the European Central Bank initiated its quantitative easing program. The dollar hit a 12-year high against the euro a day later, with the USDX jumping north more than 3% in five trading days ending March 10. Remarkable, yes, but the USDX has the potential to climb even higher.2,3

Before this dollar bull market, we had a weak dollar for some time. A dollar bear market occurred from 2001-11, partly resulting from the monetary policy that the Federal Reserve adopted in the Alan Greenspan and Ben Bernanke years. As U.S. interest rates descended to historic lows in the late 2000s, the dollar became more attractive as a funding currency and demand for dollar-denominated debt increased.4

In Q1 2015, private sector dollar-denominated debt hit $9 trillion globally. Asian corporations have relied notably on foreign currency borrowing, though their domestic currency borrowing is also significant; Morgan Stanley recently researched 625 of these firms and found that dollar-denominated debt amounted to 28% of their total debt.4,5

So why has the dollar strengthened? The quick, easy explanation is twofold. One, the Fed is poised to tighten while other central banks have eased, promoting expectations of a mightier U.S. currency. Two, our economy is healthy versus those of many other nations. The greenback gained on every other major currency in 2014 – a development unseen since the 1980s.4

This explanation for dollar strength aside, attention must also be paid to two other critical factors emerging which could stoke the dollar bull market to even greater degree.

At some point, liabilities will increase for the issuers of all that dollar-denominated debt. That will ramp up demand for dollars, because they will want to hedge.

Will the dollar supply meet the demand? The account deficit has been slimming for the U.S., and the slimmer it gets, the fewer new dollars become available. It could take a few years to unwind $9 trillion of dollar-denominated debt, and when you factor in a probable rate hike from our central bank, things get really interesting. The dollar bull may be just getting started.

If the dollar keeps rallying, what happens to stocks & commodities? Earnings could be hurt, meaning bad news for Wall Street. A strong dollar can curb profits for multinational corporations and lower demand for U.S. exports, as it makes them more expensive. U.S. firms with the bulk of their business centered in America tend to cope better with a strong dollar than firms that are major exporters. Fixed-income investments invested in dollar-denominated assets (as is usually the case) may fare better in such an environment than those invested in other currencies. As dollar strength reduces the lure of gold, oil and other commodities mainly traded in dollars, they face a real headwind. So do the economies of countries that are big commodities producers, such as Brazil and South Africa.6

The economic upside is that U.S. households gain more purchasing power when the dollar strengthens, with prices of imported goods falling. Improved consumer spending could also give the Fed grounds to extend its accommodative monetary policy.6

How are people investing in the dollar? U.S. investors have dollar exposure now as an effect of being invested in the U.S. equities market. Those who want more exposure to the rally can turn to investment vehicles specifically oriented toward dollar investing. European investors are responding to the stronger greenback (and the strong probability of the Fed raising interest rates in the near future) by snapping up Treasuries and corporate bonds with longer maturities.

Stocks can still rally when the dollar is strong. As research from Charles Schwab indicates, the average annualized return for U.S. stocks when the dollar rises has been 12.8% since 1970. For bonds, it has been 8.5% in the years since 1976. A dollar rally amounts to a thumbs-up global vote for the U.S. economy, and that can certainly encourage and sustain a bull market.7

Mike Moffitt may be reached at ph# 641-782-5577 or email:  mikem@cfgiowa.com

website:  www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

There is a potential for fast price swings in commodities and currencies that will result in significant volatility in an investor’s holdings.

Citations.

1 – wsj.com/mdc/public/npage/2_3050.html?mod=mdc_curr_dtabnk&symb=DXY [3/9/15]

2 – reuters.com/article/2015/03/10/us-markets-stocks-idUSKBN0M612A20150310 [3/10/15]

3 – forbes.com/sites/maggiemcgrath/2015/03/10/u-s-equities-hammered-on-dollar-strength-and-oil-weakness/ [3/10/15]

4 – valuewalk.com/2015/02/us-dollar-bull-market/ [2/4/15]

5 – tinyurl.com/ptpolga [2/25/15]

6 – blogs.wsj.com/briefly/2014/12/24/how-a-strong-dollar-affects-investors-at-a-glance/ [12/24/14]

7 – time.com/money/3541584/dollar-rally-global-currencies/ [2/13/15]