By Pete Biebel, Vice President

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We’re now a year into the Trump era.  Three-hundred-sixty-some days ago, America elected a new Number One.  Over that time markets in the U.S. have responded to, first, the anticipation of great change and, later, to the anticipation of some change. One year into the reign of Trump, the market has had to cope with failed legislative changes, the threat of nuclear war, the lack of cohesiveness within the Republican party and tweets. Thankfully, generally improving economic conditions and steadily increasing earnings have helped to prop up stocks while progress in Washington stagnated.

By my count, the S&P 500 Index (SPX) has gained nearly 21% since November 8th, 2016. The Dow Jones Industrial Average (DJIA) added more than 28% and the NASDAQ Composite added a little over 30% over the past 52 weeks. About one-third of those gains came in the four months following the election.  The Trumpian tide lifted almost all sectors of the market through the holidays, through the inauguration, through the promise of a major infrastructure program and right up to the morning after Mr. Trump’s surprisingly good address to Congress on the evening of February 28th.

The post-election euphoria was most evident in small-cap stocks and stocks in the Financial sector.  Financials leapt 18% in the first two months after the election, and had stretched to a 25% gain through the first Friday in March.  Then, as ACA reform stalled and the split in the Republican party widened, the overall market took a breather.  Financials gave back about 40% of their post-election gain over the next 1 ½ months.

Through the spring, as Mr. Trump’s glow faded and as the overall averages stalled, the Technology sector was partying like it was 1999.  A handful of large tech companies led the market higher.  As of early-March, the Tech sector had rung up a post-election gain of 11.5%, less than half that of Financials, but, over the next few months, Financials sagged while Tech caught up; both sectors had gains of about 18% by late-May.

Beyond surging Tech giants, two interrelated factors had the greatest impact on the relative performances of the various market sectors: declining interest rates and a weakening U.S. Dollar. The yield on the benchmark Ten-Year U.S. Treasury Notes spiked from about 1.8% to nearly 2.6% in the two months following the election. That rate vacillated within about 15 basis points of 2.5% through the winter, as Wall Street vacillated on the potential for change in Washington. As the likelihood for immediate progress faded, so too did interest rates. That Ten-Year yield slipped back to near 2.0% into early-September.

Meanwhile, the path of the relative value of the Dollar paralleled the markets’ confidence in the new administration.

The Wall Street Journal U.S. Dollar Index spiked more than 6% higher between the election and early-January, but that confidence was apparently overblown. The Dollar faded steadily from there, and, by mid-summer, it had dropped below its Election Day level. At its year-to-date low in early-September, that index was nearly 4% below its early-November 2016 level and nearly 10% below its January high.

Through the first half of the year, the major market averages also ebbed and flowed with the administration’s apparent effectiveness.  SPX ascended steadily from November into its March 1st peak just above 2400. The averages gapped up that morning in celebration of Mr. Trump’s aforementioned address to Congress, but that morning was the peak in optimism. The 2400 level became a wall for SPX just as the promise of Trump’s wall and other campaign initiatives faded. When SPX finally blew through that level, nearly three months later, it was more thanks to the runaway tech sector and improving earnings than any progress on Capitol Hill.

Through the summer, the Technology and the Basic Materials sectors were strong enough to keep the overall averages inching higher even as several other sectors stalled. Small-cap stocks, in particular, were a drag on the market into mid- August.  Small-caps acted as a reliable barometer of whether the market believed any significant action was coming out of Washington in the near future. Those smaller companies are likely the ones that would realize the greatest benefit from reduced regulatory burdens and lower tax rates. As a group, they saw the largest gains in the weeks after the election, but eight and a half months into the year, they had slumped below their early-January peak. As progress on a budget resolution and tax reform became more likely, small-caps shot to new highs in September. Unfortunately, they’ve made no new progress since then. The fact that the group, as measured by the Russell 2000 Index (RUT), has had net losses in each of the last two weeks, including through the release of details on the tax plan last week, indicates that the market has little confidence that those reforms will be enacted this year.

In a year laced with big gains and dozens upon dozens of record highs, the averages have had an unusually large number of very narrow range phases and record low volatility.  While the market hasn’t had much to celebrate through the first year of the Trump presidency, it apparently has also had very little to fear. Even the recent confrontation with North Korea produced just a temporary blip of volatility. Most market participants would likely agree that the market is way overdue for a spike in volatility.  Yet, like a group of golfers continuing its round as a thunderstorm approaches, traders continue to play, but with their eye always on the nearest shelter. At whatever time and for whatever reason the storm arrives, it could be a doozy. When/if the lightning does hit, we’re likely to see everyone dashing for cover at the same time.

Replaying a pattern that has occurred frequently this year, the broad averages inched higher last week with very low volatility. In a week loaded with potential catalysts (Fed meeting, tax plan, new Fed chair), it was a handful of good earnings announcements that provided the most help. COMP was best with nearly a 1% gain; DJIA added 0.45% and SPX 0.26%. One indication of how blasé the overall market was that the number of declining issues last week exceeded the number of advancers on both the NYSE and the NASDAQ.

SPX ended last week near 2588. My guess is that there’s not much to worry about unless and until SPX falls below the 2540 area. The market is likely to see at least a flash of volatility in the near future.  In other circumstances earlier this year in which volatility reached such low levels, a spike in volatility has come within the next several weeks.  As I suggested last week, RUT could be the index to watch over the coming weeks. If the recent slow decline in that index accelerates, it could indicate that the overall market is beginning a timeout phase.

The week ahead brings only a few economic data updates and the fewest earnings reports in several weeks.

Date Report Previous Consensus
Tuesday 11/7/2017 JOLTS Job Openings 6.082mm 6.082mm
Thursday 11/9/2017 Jobless Claims 229K 232K
Friday 11/10/2017 Consumer Sentiment 100.7 100.0

 

Links to previously published commentaries can be found at benjaminfedwards.com/Company News/Blog/Market.