The election sent a shock wave through markets, both domestic and international, but not quite in the way expected…
Over the prior weekend it was announced that the FBI had not changed its conclusion regarding Secretary Clinton’s email investigation. Monda, markets rallied heavily; it was believed by many that markets were anticipating a Clinton Presidency. On Tuesday night as it became more and more likely that Donald Trump was going to be elected the 45th President, Dow Jones futures began to sink heavily.
Just to be clear futures are not the Dow Jones. Futures are their own financial instruments, basing contract prices on a future date and value.
This means that people were buying and selling contracts with the expectation that the Dow Jones was going to fall 800 points the next day… it never did! To the contrary it rose 257 points and closed at a record high on Thursday.
Why did either happen? Why the expectation of an 800-point drop and why the actual surge?
Why the expected drop:
Markets like certainty and much like Brexit back in June, the markets predicted incorrectly which way the vote was going. The expectation then became a correction on the markets as investors would readjust to the actual outcome.
Why the actual surge:
The markets did readjust. There were clear winners and losers on the market last week. Many of the winners were financials, healthcare, and industrials. Much of this was due to expectations of expanded spending on infrastructure, changes to the ACA, and the potential for a change in the Federal Reserve, as Chair Yellen’s seat is up for renewal in 2018. Technology and consumer defensive stocks did not do well. Also, prices suffered on the bond markets, with the 10 year treasury yield increasing from 1.82% to 2.14% (yields and price move in opposite directions)[1].
Conclusion
So, while on the headline it appears as a surge, it truly was a re-allocation of investment holdings. It just so happens that the major indexes that are watched globally were on the winning end. It is important to remember that the actions thus far are predictive, as Trump is still the President-Elect. It is still to be determined what from his campaign promises will become actionable items as President… That is the Trump card…
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[1] www.mfs.com – week in review