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Post Election Thoughts Late Nov 2016

The days are getting shorter, the Thanksgiving leftovers are almost gone (the pie was gone a few days ago), and before we know it another year will be in the books.                                          

There have been a few changes in the landscape since I last checked in with all of you.  Namely a national election, a huge swing in the US stock market sentiment, and a whole new series of unknowns following the election of a person who has never held office of any kind before.  So far investors are optimistic.  

My friends at the Sherman Sheet provide us with some market statistics:

This past week, the Dow Jones Industrial Average, NASDAQ, and Russell 2000 all hit all-time highs together for the first time since 1999.  Major indexes were strong both at home and around the world.  The Dow Jones Industrial Average gained +284 points to close at 19,152, up +1.5%.  The tech-heavy NASDAQ Composite rose +77 points to end the week at 5398, up +1.45%.  Smaller market caps outperformed large caps for the third consecutive week, as the MidCap S&P 400 index rose +2.17% and the SmallCap Russell 2000 added +2.4%, while the LargeCap S&P 500 gained +1.44%.  Of note, both the Dow Jones Transports and Utilities indexes had strong weeks.   The defensive Utilities sector joined the fun after having been beaten down since the election, gaining +2%.

In commodities, oil plunged almost -4% on Friday, but for the week managed to end down only -0.65%.  Precious metals had a third consecutive down week as Gold fell -2.5% to close at $1,178.40 an ounce while Silver dropped ‑0.93% to $16.47.  The industrial metal copper, an indicator of global economic activity, had a big week by surging over +8%

In U.S. economic news, the number of Americans who applied for new unemployment benefits rose by 18,000 to 251,000, according to the Labor Department.  The increase comes one week after initial claims fell to a 43-year low.  Economists had forecast initial claims to rise to a seasonally adjusted 248,000.  Most of the increase appears to have come from Illinois and California.  Initial claims have remained below the key 300,000 threshold for 90 straight weeks, the longest streak since 1970.  The economy has been adding about 180,000 new jobs a month this year, and the unemployment rate remains at a low 4.9%.

Existing home sales soared to almost a 10-year high last month, further evidence of the strong demand supporting the housing market.  According to the National Association of Realtors, existing home sales ran at a seasonally adjusted annual rate of 5.6 million, an increase of +2% from September and +5.9% higher than a year ago.  Forecasts had been for only a gain of 5.4 million.  It was the fastest rate of sales since February of 2007.  All four regions of the country recorded gains.  In addition, it was the 17th straight month of yearly inventory declines with 4.3% fewer homes on the market than in October of last year.  With inventory shrinking, it’s no surprise that the median sale price ratcheted up to $232,200, +6% higher than last year. 

In contrast to existing home sales, new single-family home sales actually fell -1.9% to 563,000 in October according to the Commerce Department.  The number missed economists’ expectations of 595,000.  Nevertheless, October’s sales were +17.8% higher than October of 2015, and year to date sales in 2016 are +12.6% higher than this time last year.  The median sales price last month was $304,500, versus $298,700 a year ago.  At the current sales rate, it would take 5.2 months to exhaust the supply of homes on the market.  Strong demand for housing with the corresponding lean supply has been keeping prices relatively high.  Home builders are just now starting to ramp up construction of new homes to a level that analysts believe will sustain a healthier housing market.   

Sentiment among American consumers rose sharply following Donald Trump’s election, with many Americans expressing greater optimism now that the election is over according to the University of Michigan’s consumer sentiment survey.  The monthly survey of 500 consumers measures attitudes toward topics like personal finances, inflation, unemployment, government policies and interest rates.  The survey climbed to 93.8 last month, up a rather large move of +6.6 points to the highest level since early summer.  Richard Curtin, chief economist of the U of M survey wrote, “The post-election boost in optimism was widespread, with gains recorded among all income and age subgroups and across all regions of the country.”  However, he points out, “presidential honeymoons” can end quickly and consumers’ confidence in the economy can wane if the new administration doesn’t take quick action to improve the economy. 

Minutes of the most recent Federal Reserve meeting show senior Fed officials agreed that it may finally be appropriate to raise interest rates “relatively soon”, given the environment of an improving labor market and somewhat higher inflation.  Minutes from a two-day session in early November, show that “most participants expressed a view that it could well become appropriate to raise the target range for the federal-funds rate relatively soon.”  Noteworthy in the latest minutes is concern among several officials that the U.S. economy could be at risk if the central bank waits too long to raise rates, a marked change from just a few months ago.  The Federal Reserve will reconvene in December where an increase in key interest rates is seen as essentially guaranteed.  Financial markets see a 93.5% chance the central bank will raise its benchmark short-term interest rate range by a quarter point to 0.5%-0.75%, according to the Chicago Mercantile Exchange’s FedWatch Tool.

For some of you the last several paragraphs are mind-numbing.  Have no fear, some days the statistics are mind-numbing to me as well.  I will close with some summary thoughts on what Alternative Strategies Group is doing with the data, and what we expect in the near future.

  • By mid-summer we were lightening up on the stock market exposure and holding a large position in cash.
  • Coming into the election the uncertainty of the outcome continued to warrant holding cash.
  • On Wednesday morning, the day the results were in, we pushed all the cash positions back onto the playing field.
  • So far markets have reacted very favorably to the President-Elect Trump and the prospects of what his campaign promises might bring to the economy.  Our positioning plays into that exuberance and we hope to continue to benefit from the rising tide.
  • From a sectors of the economy focus, we are currently keying on Healthcare, Energy, and Consumer Discretionary.  I reevaluate the sectors of the economy on a weekly basis and make adjustments accordingly.

One last investing thought as I leave you...maybe we should invest in music?

In 1985 Michael Jackson was ridiculed for paying $47.5 million to buy the Beatles-packed ATV publishing catalog. Ten years later Sony paid him $115 million to form a 50/50 joint venture, then purchased the other half this past March, giving the Jackson estate a 30% annualized return.
-Forbes, November 8, 2016

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