Contrary to pre-election predictions that a Trump victory could result in a stock selloff of 8% – 10%, the market has rallied in the weeks following the election. But what is driving stock prices, and how long can it last? Kyle Jones, Financial Planner at Wamhoff Financial Planning & Accounting Services, explains.
The Numbers Behind the “Rally”
- The S&P 500 Index has rallied from 2139.56 at the close on Election day to 2198.81 at close on November 30th, representing a 2.77% rise.
- However, long-term Treasury and municipal bonds have seen selling pressure (Yields Rising) since the election.
- Currently, the multiple applied to earnings across the board in US stocks is the highest since this bull market began in 2009.
- Because stock investors believe that Trump is likely to reduce regulations that hurt specific businesses, banking stocks have soared since the election while interest rates have risen dramatically.
- In order for stock market valuations to remain at elevated levels, the Gross Domestic Product needs to increase towards 3% – 4% growth annually. It has not moved into this range thus far.
What specific sectors post the most risk in the stock market?
- The single largest sector to pose a risk would likely be the health sector, specifically health insurance companies.
- If the ACA is repealed it is likely that the future for health insurance companies becomes unclear, and markets do not like uncertainty.
- Pockets in the industrial and financial sectors, which have seen some of the largest percentage gains, could also be at risk.
What areas could offer protection should markets correct?
- Stocks that might offer reduced potential losses would likely be the utility sector, which has seen some negative price action as investors have pushed funds towards riskier sectors.
- Technology stocks recently have stumbled a bit, and could offer some downside risk reduction.
- Other assets which have seen major pullbacks and could offer safety would include precious metals and intermediate bonds.
Will markets correct in the near future?
- Guessing future prices in stocks is foolhardy. However, many analysts believe that in order for stocks to continue to move higher, we need to see strong revenue growth both top and bottom line. We also need to see expanding gross domestic product data, and fundamental data needs to rapidly improve.
- Should we start to see fundamentals deteriorate and earnings come in weaker than expected in the quarters ahead, these would be major warning signals that a correction is likely.
- Regardless of politics or future legislative actions, we are long overdue for a correction in the stock market and stocks are more expensive today than they were less than one month ago.