7 Nov 2016
Looking Past the US Presidential Election: Stay calm and carry on
This will be the last Market Perspective before the U.S. Presidential election—and we were beginning to wonder if the end would ever come! We want to remind investors again that it is a great thing to see leadership transfers in a peaceful and orderly way—that is not the case at many places in the world. For those nervous about what the results may be, we urge calm and patience. Given the polling numbers and betting markets, the stock market appears to be expecting a Clinton win and continued gridlock, with at least the House remaining in Republican hands. If the results are quite different than expectations, market volatility could surge, but we suggest investors hold tight. Much as we saw following the Brexit vote, reacting in a kneejerk fashion can be detrimental to longer term performance.
Likely due in part to election uncertainty—but also the muscle memory of the financial crisis—investors continue to cast a skeptical eye toward the stock market; despite the continuation of the 7+ year bull market. According to the Ned Davis Research (NDR) Crowd Sentiment Poll, investor sentiment remains neutral, while according to a Bank of America survey, fund managers are holding more of their assets in cash now than at any time since November of 2001. And the latest data from the Investment Company Institute (ICI) on mutual and exchange-traded fund flows shows the largest outflow from U.S. equity funds since the tumultuous August 2011 period.
This continued skepticism helps to support our bullish case as sentiment is traditionally a contrarian indicator, while also meaning that there is a decent amount of cash on the sidelines which can easily be put to work. Pullbacks are likely (and healthy), but we don’t see signs of an impending bear market unless recession risk rises significantly.
In other news…
Beyond the election, which has used up most of the media space recently, third quarter earnings season is beginning to wind down. Broadly, this reporting period has produced mixed results showing that stabilization is occurring in beaten down areas such as energy; but caution still remains with few companies willing to get too optimistic with near-term projections. It appears earnings will break the five quarter string of negative year-over-year comparisons, which would be a fundamental positive.
Economic data continues to support a sluggish growth narrative, although there are glimmers of hope that we could see at least a modest acceleration in 2017. The rig count continues to bounce back, which indicates a rebound in the energy market and could help to support an uptick in capital spending in the coming year.
Additionally, the U.S. consumer appears to be gaining some confidence. The recent Consumer Confidence Index release from the Conference Board showed a dip from the 104.1 level seen in September, which was the highest level since the recession down to 98.6 but we expect that to be a temporary blip. The housing market also continues its grinding improvement, with existing home sales moving higher by 3.2%, continuing a broad upward trend. The National Association of Realtors has noted that sales are still being held back by low inventory levels. On another potentially positive note that could signal a shift in Millennial thinking, the percentage of those buyers who were first time purchasers rose to 34% from 31%.
In another sign that there could be a shifting of lifestyles from apartment living to home buying, the housing starts number fell 9.0%; but looking inside that reading, single family starts actually rose 8.1%, while the volatile multi-family reading fell 38% according to the U.S. Census Department. And boding well for the future, building permits—a key leading economic indicator—rose 6.3%.
Businesses remain cautious, with capacity utilization coming in at 75.4%, below the long-term average; while regional manufacturing surveys such as the Empire and Philadelphia Fed indexes continue to hover around the dividing line between expansion and contraction.
The Fed’s itchy trigger finger
The focus on the Federal Reserve (Fed) will move back to the forefront following the election, with all eyes on the December meeting. Fed members have been preparing the market and investors for a hike, and we believe, after several false starts, it will actually follow through this time around. Perhaps equally as important will be the message the Fed sends around the next meeting regarding what it may be looking to do into 2017.
Stay calm and carry on. We believe U.S. earnings and economic growth will continue to support an ongoing bull market, but gains will likely be modest and pullbacks should be expected alongside political and monetary policy uncertainty.
This material is issued by Charles Schwab, Hong Kong, Ltd. The information provided here is for general informational purposes only and has not been reviewed by the Securities and Futures Commission in Hong Kong.