Not where we expected, and not where most market observers expected either. Putting the US Presidential election to the side for the moment, the 9% US equity market swoon to open the year left people thinking finishing the year flat would have been satisfying. Finishing the year with a return of inflation plus a dividend would have been a triumph. Right now we are looking at a market that is up as much in the closing weeks of the year as it was down in the opening weeks, which is heroic.
Getting the razor out and cutting a little more finely, the recent bottom on November 4th had us very close to expectations – flat to barely positive. Looking just at that US large cap equity return, for all intents and purposes all of the YTD return came since the election. What about the rest of the world? In equity terms, varying degrees of the same good news. Germany, Japan and others similarly bounced off an early November bottom. Even the UK is showing mild resilience. Returns are not as dramatic, but still bucking expectations. Populist revolts are not supposed to signal a good climate for investing in businesses, but there it is.
Counter intuitiveness extends into the bond market as well. Yields rise and equities are supposed to fall. But, the benchmark 10 year Treasury yield has climbed 70bp over the same period as the equity returns discussed. We can assume the anticipation of Fed action to raise rates, a more business-friendly policy climate in Washington DC, and a general sentiment that the dollar is a haven, account for the positivity of equity buyers.
Where does it go? Markets may need to re-rate equities based on the new political climate. Valuations looked full assuming a more-or-less status quo election outcome. But now, in an environment of US-first, business-first governing there may be a case to revisit corporate prospects, at least for those companies with US-centric workforces and supply chains. This may be a case for investing in small- and mid-sized companies that are generally more likely to be home biased in their inputs and customers. As for bonds, that “thud” we just heard may be the other shoe finally falling (along with bond prices) after years of anticipation.