Market Commentary for the week of Novemeber 14, 2016

Political economics
Politics, like investing, is all about expectations and aspiration...a kind of revelation about our collective culture and mood.  Thus, it was quite revealing that in the hours and days following last Tuesday's US Presidential election stocks reaffirmed traditional growth leadership and safe-haven investing by rallying for significant gains.  Despite fears that the result of the election might have been persuasively disruptive to the expansion achieved over the past seven years' recovery effort, buyers sought out politically expedient opportunities in tangible assets (infrastructure), pharmaceuticals (healthcare), and financials (industrial development/taxes).  In fact, curiosity about which pro-growth policies might emanate from the new administration stoked concern about currency and the bond market as well, even as the prospect for an immediate rate hike by the Federal Reserve receded into the background.  Investors are particularly worried about the economic impact of domestic project spending leading to higher inflation, causing the government to back-off austerity measures.  A rise in US interest rates would have a ripple effect upon currency and central banks around the world.

The shockingly convincing Republican victory seems to be laying the groundwork for new leadership in the stock market, most notably military/defense and infrastructure, supplanting a wave of success recently made by cyclicals and technology shares.

It is safe to say that few really envisioned the magnitude of this political tidal wave as the election, at best, was considered a toss-up.  While it was always conceivable that the outcome could be exactly as happened, recent market activity posited a different mindset altogether. 

Nevertheless, Tuesday's results now underscore massive implications for change in tax policy, foreign exchange, social entitlements, and industrial development.

Now it's left for both sides to iron out the inevitable dissent and dislike.  Economic market reactions are likely to be quite volatile, as new cycles and initiatives take shape.  We know that there will be leaders, laggards, and coincidentals in this process.  That is the nature of politics  and investing.  Thus, we also expect flux in our asset allocation weightings.  We do not yet know which policies might shape the political landscape, but we do know that new themes, new investment cycles, don't simply evolve in a matter of hours.  They need time to gain traction and earn our confidence.  I see no reason to panic at this stage of developments.  It is simply too soon to know.

All change, in fact, occurs within a much broader framework and a longer timeline of interconnected (other) events.  We should try to dissuade discussion that the financial and economic "battleship" can be spun around like a dingy, or that the direction of the markets might suddenly grind to an unenviable halt.  My proprietary integers indicate new inflections in sectors that might actually improve the likelihood of long-term economic performance.  Our position is certainly cautious about the fractious debate that will ensue, but we also do not anticipate a total destruction of the global commercial network in the offing.

Domestically, any upheaval that might develop depends upon one's point of view or political affiliation.  What America should look like  is a deeply personal perspective.  A troublingly scrambled American demographic leaves open the possibility that finding consensus will be difficult, if not impossible.  While that debate, alone, cannot derail capitalism and free enterprise, it can sow the seeds of inertia and uncertainty amongst some sectors of the financial market.  We will watch carefully for any signs of cycle acceleration or dissipation as we craft our allocation weightings for the next few months.

Signs are that capital formation and asset flow in the public and private markets have already pre-set the conditions for research, innovation, and excellence to flourish.  We will know soon enough if this year's early signs of consumer demand will persist in driving  expectations, inventory growth, and profit potential, as well as which global and niche opportunities might capture the fancy of investors later on.

Our bottom line take-away from the election is that it is unproductive and premature to dissect the minutiae while the country is still absorbing the impact of the broader schism which apparently was far from healed by the outcome on Tuesday.