Northwestern Mutual

Financial Markets Commentary For the week of Nov. 14, 2016

The pollsters, pundits and prognosticators were all wrong last week; doubly so, because not only was Donald Trump elected as the 45th president of the United States, but the stock market did not plummet the day after.

In fact, by week’s end, the Dow Jones Industrial Average had reached a new all-time high not once but twice on the way to rising 5.4%. That marked the Dow’s best week since December 2011, when it jumped 7% after central banks announced a coordinated plan to cut borrowing costs. The cut was meant to stimulate spending and stave off the feared contagion from the financial crisis in Greece. The S&P 500 also soared, driven by bank stocks, and posted its strongest week in two years, adding 3.80%. Bond yields, meanwhile, climbed to their highest level since January as investors felt Trump’s policies would promote gross domestic product growth, push up interest rates and increase inflation, all of which drive down the demand for Treasurys.

On election night, when it became clear that Trump was going to upset Hillary Clinton to take the White House – he was seen as trailing her by around four points in most polls when the voting began – stock futures plummeted. However, after the victor’s conciliatory acceptance speech early Wednesday morning, the trend reversed itself, and by the time the opening bell rang on Wall Street, investors were ready to buy, not sell. Ironically, the Dow’s best day last week – and in eight months – actually came on Monday when the Dow skyrocketed 371.52 points after the FBI announced that its latest examination of the emails of Clinton, then still the favorite, did not warrant charges. That same day, the S&P 500 ended its nine-day losing streak during which it had shed 66 points by adding 119.80 points in a single session.

The stock market’s three-day climb after the election was partly the result of the relief that the bitter campaign was finally over, that a candidate had been chosen and that the results would not be contested. But it had more to do with the prospect of Trump following through on his campaign promises to increase federal spending, cut taxes and undo regulations such as the Dodd-Frank Act, steps that will be made easier by the fact that the GOP retained its control of both the Senate and the House. Not surprisingly then, the shares of financial, health care and industrial companies jumped after the vote. On Wednesday alone, for example, shares of Goldman Sachs were up 5.9%, Bank of America’s stock surged 5.7%, and JPMorgan Chase climbed 4.6% to a new high. By the end of the week the S&P 500’s financial sector had risen 11%, according to The Wall Street Journal, while industrial companies were up 8%. In another post-election reaction, Mexico’s peso fell against the dollar as investors began to fret about Trump’s pledges to rewrite trade agreements and build a wall along the border.

At the same time, the yield on the 10-year Treasury had its largest one-day jump since July 2013 on Wednesday, up 0.203 percentage points to 2.070%, while the yield on the 30-year gained 0.247 percentage points to 2.877%, its biggest day since August 2011. (Note: The bond market was closed on Veterans Day).

Oil continues its recent slide

And yes, there was news from beyond the American ballot box last week. The price of oil continued its recent pullback after having finally reached the $50-a-barrel mark as production soared and the prospect of the Organization of the Petroleum Exporting Countries making substantive cuts in output began to seem less likely. By Friday, prices had fallen for the third week in a row as U.S. crude dipped to $43.41 a barrel, while Brent crude was down to $44.75.

China’s reserves and exports fall, as PPI and CPI rebound

China’s foreign currency reserves fell $45.7 billion to $3.12 trillion in October, the biggest drop since January, the People’s Bank of China reported. This was mainly because a stronger dollar not only spurred capital outflow but also cut the value of the stockpile. In another report, Chinese exports fell for the seventh month in a row in October, down 7.3% from a year earlier in dollar terms. And factory gate inflation was up in October while consumer prices accelerated. As a result, the Producer Price Index increased 1.2% from a year earlier, seen as a sign that the government’s steps to cut overproduction may be taking effect. The Consumer Price Index gained 2.1% from October 2015.

Small businesses waiting on the ballot box

As for reports on the state of America’s economy before the election, the index of small business optimism was up 0.8 points to 94.9 in October. However, the National Federation of Independent Business reported that “The data contained in this report shows record levels of uncertainty among small business owners, and it is tied directly to the election.” The government reported that the number of job openings on the last day of September was little changed at 5.5 million, with hires down to 5.1 million and quits coming in at 3.1 million. Over the past year, the number of openings has risen 2% while quits have jumped 12%. Wholesale inventories were up 0.1% in September from the month before. The University of Michigan’s preliminary reading of consumer sentiment for November came in at 91.6, compared to October’s final reading of 87.2. And first-time jobless claims for the week ending Nov. 5 fell 11,000 to 254,000; the four-week moving average for the week ending Oct. 29 was up 1,750 to 259,750.

A look ahead

As investors settle into what is expected to be a period of relative post-election calm, they can consider a slew of updates this week, including the latest on retail sales, business inventories, the Producer and Consumer Price Indexes, industrial production and capital utilization, housing starts and building permits, consumer comfort and the Conference Board’s Leading Economic Index.