A little shake up may be no bad thing

Two out two for the man in the street as Donal Trump duly became America’s 45th US president, analogies with Brexit are everywhere in the media. As an aside these events and outcomes have made it a much more colourful year than it might otherwise have been. Perhaps the world needs shaking up from time to time?

The election of Mr Trump was expected to have the same impact on global markets that the Brexit vote had. We wrote on Wednesday as the news broke that premarket indications were for a fall of up to 5%, that did not last long. Equity markets around the globe recovered even more quickly on Wednesday than they did in June.  Money managers around the globe were made to look silly. One commentator quoted in the Wall Street Journal that he believed the Vix could rise 60% on a Trump win, and not recover for some time. The actual result was a fall of almost 40%, suggesting investors felt calm about life after Trump. In contrast the treasury Vix index has risen sharply this week.

The real action has been in the bond market as yield curves have steepened. The yield on the 30 year US treasury has risen 50basis points in the past month, in contrast the 3 month only 15 basis points. This steepening of the yield curve traditionally would suggest markets are becoming more optimistic for economic growth.

One just must look at how this move in bonds has impacted the performance in individual market sectors. For several years, the so-called growth stocks, personal goods, tobacco, utilities have performed as investors have looked for yield and shunned those sectors that respond better to economic growth, or so called value.

In the past 30 days, industrial metals and mining sectors are up between 15 and 20%. In contrast, personal goods down 13%. The beverage sector, down 10%. According to the last Merrill Lynch fund manager survey in mid-October, fund managers were switching out of sectors such as the pharmaceutical and into mining. Banks, which have been out of favour for so long, benefits as much as any from a steepening yield curve has also been attracting capital. When sectors start to rotate, the moves can be swift and brutal for fund managers caught on the wrong side.

It is remarkable how quickly sentiment can change, Trump at the beginning of the week was considered disaster for America. On Thursday JP Morgan are quoted that markets should rally as a Trump term will bring decreased regulation, favourable tax reform, increased fiscal spending and less congressional gridlock should drive revenue growth. Let’s all raise a toast to that.

Posted on November 10, 2016 .