The Post-Election Markets Change Course

The major market moves that occurred immediately after the election are either reversing or pausing.

The moves right after the election looked a lot like panic buying and short-sale covering. Many investors were surprised by the election results, and unexpected news always accompanies these sharp changes in market trends. The moves also weren’t accompanied by any change in economic or business fundamentals. That’s why I’ve said since late November that investors overreacted to the election.

After the election, U.S. stocks soared along with the dollar. International stocks struggled, and gold declined. Treasury bonds registered significant declines.

Things have been different over the last month or so.

Let’s take a look at the funds in our Retirement Watch portfolios.

Price Latin America dropped sharply after the election, partly because of the stronger dollar and partly because of trade war fears. It still is down 5.62% for the last three months. But it’s up 3.10% so far in 2017 and 4.39% for the last four weeks. DoubleLine Emerging Markets Fixed Income also declined after the election, though not by a lot. But in the last four weeks it is up 0.90%, and it is up 0.49% so far in 2017. It is now down only 0.08% for the last three months.

DoubleLine Total Return Bond also declined because of higher interest rates (though not as much as most other bond funds). It is still down 1.19% for the last three months (which puts it in the top 18% of Morningstar’s bond funds). But it’s up 0.38% for 2017 and 0.61% for the last four weeks. One of our weaker funds lately is WCM Focused International Growth. It is still down 5.36% for the last three months. But it’s up 1.42% in the last week, 1.08% year to date, and 0.83% for the last four weeks.

Mairs & Power Growth soared with the stock indexes after the election, but it’s slowed since. It’s up 4.82% for the last three months. But it’s down 0.33% for the last four weeks and is up only 1.48% so far in 2017. T. Rowe Price New Era had a nice gain after the election. It is still up 2.68% for the last three months. But it’s up only 0.15% so far in 2017 and is down 1.87% for the last four weeks.

Let’s also look at some investments we don’t own to show how volatile the post-election period has been. Long-term bonds were declining even before the election, but they really crashed after the election. Vanguard Long-Term Treasury Bond is down 7.60% for three months. But it’s up 1.93% so far in 2017 and up 3.54% for the last four weeks. It is even up 1.66% in the last week.

The dollar was the major mover of investment values after the election with a strong rally. It still is up 5.15% for three months. But it’s up only 0.39% for the last month and is down 0.29% in 2017 and 0.94% for the last week.

Gold dropped a lot after the election. It’s down 5.61% for three months. But it’s up 2.60% for 2017 and 2.14% for the last four weeks.

One of the lessons is not to be pushed into an investment position by headlines, forecasts, a clamoring crowd or short-term trends. Some of the post-election forecasts were hyperbolic and goaded many investors into overreacting. You need to have an investment process and follow it.

Another lesson is to always keep some balance and diversification in your portfolio. At times, we’ll want to avoid some assets because their valuations or fundamentals are so bad, and we’ll want to own an extra amount of others because they’re very attractive. But we rarely want a one-way bet in our portfolios, especially one based on predictions.

Still another is that investments rarely move in linear fashion. Even the strongest bull markets or bear markets have periods, sometimes extended periods, when prices are flat or move in the opposite direction of the longer-term trend.

Our strategy won’t generate the highest returns during any short-term period. But over the long-term, we’ve shown that steady, solid returns with low volatility help us beat most investors with a fraction of the drama.

The Data

There wasn’t much data in the last week, but some of it attracted a lot of attention.

The big news for the week was the Small Business Optimism Index from the NFIB. This rose by 7.4 points to 105.8. That’s the biggest one-month increase since about 1980 and the highest reading for the index since December 2004. Only two of the 10 index components didn’t have gains for the month.

Last week’s Employment Situation reports, of course, received a lot of notice. Fewer jobs were created than expected, but the job growth still was solid at 144,000. That kept the unemployment rate steady. More importantly, average hourly earnings increased by 0.4% after declining by 0.1% last month. That’s the second big wage gain in three months. It adds to our expectations that wages will continue to rise. That will help economic growth and increase inflation.

The Job Openings and Labor Turnover Survey (JOLTS) showed another solid increase in job openings, but hirings lagged behind. For about two years the report has indicated that businesses have had trouble finding the employees they want, because openings have exceeded hires. The survey also showed that employees are more confident because they are more willing to quit jobs in search of new ones.

New unemployment claims rose by 10,000, partly offsetting last week’s revised 30,000 decline. That still leaves both the weekly and four-week average close to the historic lows reached last fall.

Factory Orders declined 2.4%. But when the volatile transportation sector is excluded, orders rose 0.1%. There also was a 0.9% increase in core capital goods, which is basic business investment. That’s another positive sign for the economy.

The Markets

Markets overall had a positive week. The S&P 500 is up 0.24% for the week ended with Wednesday’s close. The Dow Jones Industrial Average eked out a 0.08% gain. The Russell 2000 lost 1.04% for the week. The All-Country World Index rose 0.42%. Emerging market stocks gained 1.77%.

Long-term treasuries notched another gain, this time 1.74%. Investment-grade bonds rose 0.44%. Treasury Inflation-Protected Securities (TIPS) gained 0.58%. High yield bonds returned 0.28%.

The dollar dropped again, this time by 0.94%.

Energy-based commodities declined 0.90%. Broader-based commodities gained 0.05%. Gold gained 1.25%.

Bob’s News & Updates

Many people have given friends and family copies of my latest book, the revised edition of “The New Rules of Retirement.” Readers say it has been a big help to them.

I’m getting ready for the MoneyShow Orlando, Feb. 8-11 at the Omni Orlando Resort at ChampionsGate. For free registration use my priority code, 042315, and mention it when you call 1-800-970-4355 to register.