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Post-election stock market rally pushes indexes toward new highs

William Riegel, Chief Investment Officer TIAA Investments


November 18, 2016

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The past week was highlighted by the dollar’s late-week surge to a 13-year high against a basket of currencies and markets pricing in a near-certain December Fed rate hike. Despite these headwinds, on November 17, the S&P 500 Index came within three points of August’s record-high close. The index slipped the next day, trimming its gain for the week to about 0.9% on the heels of a 3.9% advance the week before. Equities got a boost from rising oil prices and some encouraging U.S. economic data.

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


Article Highlights

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. 

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. 

Additional TIAA perspective on post-election equity market performance can be found here.

Current updates to the week’s market results are available here.

Fixed income

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.


Despite the past week’s post-election surge, renewed volatility is possible in the near term due to lingering uncertainty about how the Trump administration will perform. One early clue may come if he identifies a cabinet before his swearing-in on January 20. If so, markets may well have a clearer sense of the direction in which he will lead, based on his choices. It’s more likely, however, that a full understanding of Trump’s agenda—and thus, any truly market-moving policy decisions—may have to wait until the first quarter of 2017.

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.

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.

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%.