Stock market rally peters out as investors step back

A rally in major world stock markets stalled on Thursday as investors reassessed positions after Tuesday's US presidential election, while US bond yields continued to climb on fears of a revival in inflation resulting from potential expansionary fiscal policy under US president-elect Donald Trump.

Investors have quickly shifted to a focus on Mr Trump’s priorities, including tax cuts, an increase in defence and infrastructure spending, along with bank deregulation.

Stocks in Europe and the US reversed course and turned negative, with utilities down more than 4 per cent in Europe.

The Iseq ended the day flat at 6.229.69 points in line with the rest of Europe after a two-day rally from heavyweight CRH petered out.

Shares in the building materials group, which advanced more than 8 per cent on Wednesday on reports it will benefit from a rise in infrastructure spend under Donald Trump’s presidency, were trading up 5 per cent during the day but gave up those gains to close up just 27 points to €32.37.

Wall Street was pulled lower by a drop in the technology sector, which was on track for its biggest decline since June 24th.

‘Plain and simple’

“In a higher rate environment, growth stock valuations aren’t what they were in a lower rate environment, that’s just plain and simple,” said Stephen Massocca, chief investment officer, Wedbush Equity Management in San Francisco. Banking shares in the US continued to rally and were up more than 2 per cent on the session, and more than 9 pe rcent over the past four sessions.

Stocks on Wall Street had rallied on Wednesday following Mr Trump’s stunning win, with companies expected to benefit from his reflationary policies seeing the biggest climb, while bond proxy sectors such as utilities and real estate slumped.

“I would start looking to put some money to work in some of these names, especially the ones with 9, 10 per cent dividend yields,” said Mr Massocca.

The Dow Jones industrial average rose 145.15 points, or 0.78 per cent, to 18,734.84, the S&P 500 lost 0.34 points, or 0.02 pe rcent, to 2,162.92 and the Nasdaq Composite dropped 57.32 points, or 1.09 per cent, to 5,193.75.

The benchmark S&P index retreated after rising as much as 0.9 per cent earlier in the session.

Europe’s index of leading 300 shares was down 0.3 per cent after earlier touching a two-week high.

MSCI’s all-country world index edged up 0.05 per cent after rising as much as 0.9 per cent. Bond yields continued their ascent, amid the expectation interest rates will rise under increased spending.

Benchmark notes

Benchmark 10-year notes were last down 7/32 in price, yielding 2.087 per cent, up from 2.064 percent late on Wednesday. The yields rose as high as 2.125 per cent, the highest since January. .

As investors decipher what a Trump presidency would mean to the financial markets, St Louis Federal Reserve President James Bullard repeated his call that a single interest rate increase would be adequate for the foreseeable future.

Bonds and equities have broken in opposite direction since the election result emerged, with investors anticipating increased government spending will help corporate bottom lines — and boost stocks — but raise national debt and inflation, which is leading to a wide-ranging sell-off in bonds.

The shift between bonds and equities could represent a turning point in financial markets. For the first time in nearly a decade, markets are not being helped by central bank policy, with the Federal Reserve moving gradually from accommodation to tightening over the past year.

“The market is starting to discount what is likely to be an aggressive fiscal stimulus package comprised of personal and corporate tax cuts as well as infrastructure spending,” said Alan Gayle, director of asset allocation at RidgeWorth Investments. “The exact degree and shape of it are still unknown but ultimately we should see a boost to growth in 2017.”

– (Reuters / Copyright the Financial Times Limited 2016)