November, a Pivotal Month in the History of Financial Markets
$DIA, $SPY, $QQQ, $VXX, $GS, $JPM
November marked a Key shifts for global financial markets, with a number of asset classes from financial stocks, emerging-market bonds to hard commodities staging sharp price swings in the space of just 3 weeks.
Investors believe that the election of Donald Trump presages a major shift for the global economy, marked by trade protectionism, a stronger US inflation outlook (growth), and a higher US fiscal deficit.
The Key units of global asset repricing are a stronger USD, an increase in US growth expectations, fears of a more protectionist administration, and a steeper US yield curve which brought the premium for borrowing at the long-end, relative to short-end obligations, back into the Green.
Developed-market equities have been the focus over the past 3 weeks, with a rotation out of defensive stocks in favor of consumer discretionary shares, industrial commodities, and financials underscoring how a re-pricing of growth expectations has trumped the prospect of a higher discount rate.
Fixed-income has fallen out of favor, stocking fears the 35-year bond Bull-run is coming to a halt. That signals a reversal of the perverse investment strategy in 1-H of this year to buy equities for yield, and bonds for capital gain.
November was the worst month on record for the Barclays Aggregate Total Return Index, which staged a 4% loss, as yields on US 10-year Treasuries spiked from 1.8 to 2.4% in swings reminiscent of Y 2013’s Bernanke “taper tantrum”.
The election of Donald Trump and the GOP sweep of Congress sparked a major divergence across asset classes and also between developed and emerging markets. In years to come markets may look back at the month just passed as one of the most pivotal in recent memory.
Most asset classes were in a relatively stable trading range in the 1st 8 months of the year. All that changed in the month after the Donald Trump’s victory over Hillary Clinton
With the prospect of regulatory relief from a Trump Administration, the S&P 500 Financials Index returned 13.9% in November, while Copper gained 18.9%, its best monthly gainer in a decade, that driven, in part, by Donald Trump’s campaign pledge to increase infrastructure spending.
By contrast, emerging-market local-currency bonds had their worst month of Y 2016, with Latin American debt, tracked by IHS Markit, shedding 7%.
The drop in local currencies erased returns for equity and debt investors in USD terms.
The sharp appreciation of the Buck, and associated liquidity fears for emerging markets next year has challenged leveraged fixed-income trades that rely on cheap USD funding, with the cost to borrow USDs in Japan rising.
November saw credit and rate markets taking a hit, while developed equity markets led the gains.
Many financial analysts, not this one, have been criticized for suggesting beforehand that a Donald Trump victory would instigate a selloff in assets but the reality is that of the 28 global assets HeffX-LTN cover, ex-currencies, 11 are up in November in USD terms, those being US assets.
Credit, particularly US high yield, has had a solid year so far while November losses have pared YTD gains in developed rate markets.
The reason behind November’s market-moving month, is this: investors are positioning for a game-changing shift in US fiscal and monetary policies.
Last week a group of analysts, including Goldman Sachs (NYSE:GS) and JPMorgan (NYSE:JPM) have upgraded their index forecasts for the S&P 500 over the next 2 years, citing the prospect of tax reform, regulatory relief and higher government spending, while downgrading their outlook for emerging markets.
Have a terrific weekend