William Riegel, Chief Investment Officer TIAA Investments
November 18, 2016
The dollar’s rise has been fueled by a number of factors, including expectations that a Trump administration’s plan for aggressive fiscal stimulus will lead to faster economic growth and higher inflation. This, in turn, may prompt the Fed to raise interest rates at a brisker pace than previously anticipated.
William Riegel, Chief Investment Officer, TIAA Investments
Contributing to the positive mood was the president-elect’s acceptance speech, which struck a more conciliatory tone than his campaign rhetoric, and the prospect of a pro-growth, pro-business agenda that would be supportive of stocks, particularly in key sectors.
Not all stocks fared equally well. Among those getting the greatest post-election lift were banks (because of rising interest rates and the likelihood of less stringent financial regulations under a Trump administration) and pharmaceuticals (threatened by potential new drug pricing controls if Clinton had won). Industrial names also benefited, reflecting hopes for increased infrastructure spending, as did coal and fossil-fuel energy industries, which otherwise may have been subject to closer environmental and regulatory scrutiny.
Additional TIAA perspective on post-election equity market performance can be found here.
Underperformers included health insurers likely to be most affected by an overhaul of the Affordable Care Act, technology companies that could suffer from possible trade and tariff issues, and high-dividend-paying stocks (utilities, real estate investment trusts, and consumer staples) that generally become less competitive as interest rates rise.
Current updates to the week’s market results are available here.
Treasury and non-Treasury yields alike have climbed significantly since the election. However, the spread, or yield differential, between Treasuries and most other fixed-income sectors has been fairly stable, suggesting an orderly transition to higher rates. The rise in yields reflects market concern that tax cuts and increased infrastructure spending, should they come to fruition, could potentially overheat the economy, resulting in faster wage gains and higher inflation—a negative for bond prices. This concern is somewhat speculative for now, and we should have greater clarity over the next few months.
Note: U.S. bond markets were closed on November 11 for the Veteran’s Day holiday.
In fixed-income markets, it’s possible that the surge in Treasury yields has been overdone. The jump in the bellwether 10-year yield to levels above 2% is a move that may be tempered by the massive global demand for yield. This demand supports Treasury prices, which in turn helps keep a lid on yields. (Price and yield move in opposite directions). That said, we think Treasuries will remain challenged until more specific policy details emerge from Washington. Among other sectors, we think investment-grade corporate bonds should do well in light of rising yields, helped in part by large-scale foreign buying. Bank debt has room to rally further amid a steepening yield curve and potentially reduced financial regulations.
Such a lull between now and then may create the setting for a move to new highs for equities, with the potential for a seasonal market rally into year-end. Sentiment has been negative (a contrarian indicator), while corporate earnings estimates have moved higher. In general, we think performance will likely continue to vary along the sector-specific preferences that began to play out this week.
For the economy overall, we see continued strength in the near term, with further support from the prospect of increased fiscal spending and healthier inflation. With that in mind, we fully expect the Fed to remain on track for a rate hike in December, and we now expect the10-year Treasury yield to end the year at 2.25%, up from our previous estimate of 1.9%. Our forecast for fourth-quarter GDP growth currently stands at 2.1%.
Foreign stock market returns are stated in U.S. dollars unless noted otherwise.
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