After Donald Trump bump, are stocks due a breather?
Stocktake: Round-number milestones historically associated with under-performance
Donald Trump: The billionaire’s shock presidential victory, like the Brexit vote, caused markets to tumble before bouncing back. Photograph: Johannes Eisele/AFP/Getty Images
The so-called “Trump bump” has seen the S&P 500 rally by 8 per cent since its election night low. Thus far, the rally closely resembles the post-Brexit bounce, which also gained 8 per cent over a three-week period. That was followed by a pause for breath, indices subsequently trading in a narrow range as stocks consolidated gains.
The Dow Jones recently cleared 19,000 for the first time. Crossing these round-number milestones has historically been associated with below-average performance. In four of the last five occasions, LPL Research notes, stocks have been lower a month later. Stocks also tend to dip during the first half of December, the firm notes.
The bulls remain in control, however. It took almost two years for the Dow to go from 18,000 to 19,000. Historically, says LPL, markets registered strong gains when milestone levels were breached following periods of low returns.
This reflected the fact that breakouts from long trading ranges tend to indicate a genuine conviction that market fundamentals have changed for the better. Additionally, seasonal weakness is usually short-lived, with indices famously tending to enjoy a Santa Claus rally in the latter half of December.
Indices are extended, but any pullback is likely to be minor. Buying any dips remains the obvious trade.
Politics weighs on European stocks
Global stocks may have enjoyed a fine November, but sentiment regarding European equities remains muted, the Euro Stoxx 600 barely budging over the last month.
In normal conditions, European stocks would have enjoyed a nice bounce. The euro fell by 4 per cent against the dollar in November, which is good news for European exporters (some 40 per cent of euro zone sales are made outside the region). The global bond rout has resulted in money flooding into equities, but although European bond yields have also risen, little of that money has made its way into European stocks.
The obvious explanation is growing anxiety regarding political risks. Two major political upsets – Brexit and Trump – mean investors are increasingly bracing themselves for unpalatable populist developments. Sunday’s Italian referendum has occupied investors in recent months, while support for the far-right in France will be closely watched ahead of next April’s presidential election.
The current focus on European fragilities has obscured the positives, namely rising bond yields, a weak euro, monetary stimulus and relatively attractive valuations. If political concerns do ease, European stocks may shed their currently unfashionable status.
Nuns turn to trading for returns
2016 is unlikely to see a better headline than “Get Thee to a Brokerage: How Low Rates Turn Nuns Into Traders”, the Wall Street Journal’s recent account of how ultra-low rates have prompted one German convent to venture into the world of DIY investing.
Today’s rates “can bring tears to one’s eyes”, said Sr Lioba Zahn. Concerned, she “started by googling what a swap is” and now runs the Mariendonk convent’s €2 million portfolio. Her best trades, she said, were getting out of Deutsche Bank and Volkswagen prior to their share price crashes. These moves helped the portfolio return 2.6 per cent last year.
Still, one could query if an active stock-picking approach is appropriate in such cases. Regarding financial research, Sr Lioba says she understands that every third sentence, compared with every 10th when she started. That’s not ideal for navigating global financial markets.
StockTake’s advice to the sisters is simple: stick to diversified index funds.
2016 confounds forecasters
Strategists are currently busy prognosticating on what’s in store for markets in 2017. Still, as Japanese brokerage Nomura pointed out last week, forecasters didn’t exactly cover themselves in glory in 2016.
Consensus forecasts badly overestimated US growth and inflation prospects, Nomura noted. Three Federal Reserve rate hikes were forecast, but rates have thus far remained unchanged. China was expected to “implode”; it didn’t. No one expected sterling and the Mexican peso to crash, mainly because no one was betting on Brexit or a Donald Trump presidency. Price forecasts regarding the dollar were “almost spot on”, but for the wrong reasons.
The current consensus, Nomura notes, is that 2017 will see faster growth in the US and weakness in emerging markets. But only the naive would put much faith in these forecasts. 2016 is yet another reminder that serious investors should always expect the unexpected.
The pretty good, the fairly bad and the decidely ugly
As months go, November may well be remembered as “one of the most pivotal in recent memory”, said Deutsche Bank’s Jim Reid.
Good November: US small-cap stocks surged 11 per cent, their biggest monthly gain since October 2011.
Bad November: Gold tanked, its 8 per cent fall representing its worst monthly performance since June 2013.
Ugly November: Global bonds shed $1.7 trillion – the biggest monthly fall in history.