Near term looks promising; Trump effect still in play. May be setting up a nice year-end rally.
Trump’s recent victory has bumped up the US market noticeably as stocks hit a new all-time high this week. Unfortunately, the rally wasn’t broad based, with only a few sectors leading the recent rally: banks, drug manufacturers, and industrials (the market expects less regulation and increased infrastructure spending). On the other hand, real estate, gold, and bonds were all weak as interest rates increased.
We see no obvious reason for a near term pullback in the stock market and feel that we may see continued strength through the year end.
Biotech and Financials win through a lack of regulation.
The big winner of a Trump presidency may be bio-tech and pharmaceutical sectors for a few reasons, the main one being a lack of regulation in the drug manufactures. The BioTech sector had struggled through a rough 2016 with talk of increased regulation under a Clinton presidency. The heightened unknown of regulatory changes depressed prices in the sector, but it now appears that the BioTech sector could rebound nicely as regulatory changes appear less likely.
Trump’s rhetoric about repealing Affordable Care Act (ACA) may sound like a negative for the health care industry, but could result in sizable tax savings to the BioTech sector. Part of the ACA included a clause called the Branded Prescription Drug Fee, which imposes a tax on drug makers proportional to their market share. A tax target for 2017 was set to be $4 billion. This means that a drug manufacturer with a 10% market share of all branded drug sales could be responsible for $400 million (10% of $4 Billion) in taxes next year. If the ACA is repealed, it could trigger some large tax savings and benefit biotech's bottom line handsomely.
Interest rates may tick up but should remain relatively low for the foreseeable future.
Although we expect to see a .25% increase in interest rates at the December Fed meeting, we suspect that we will continue to be in a low interest rate environment for the near future. Global interest rates remain historically low, and we suspect they will remain that way for some time.
Stock market valuations are elevated. The long-term outlook looks less appealing.
US stock valuations are stretched, and although we are still optimistic of improved corporate earnings, we feel that investors are still paying a large premium to own stocks. Caution should be exercised in stock selection. A stronger US dollar may be problematic for large multinational companies that have been market leaders thus far in 2016.
Investors should consider the risk / reward trade-off with any new investments and adjust long-term expectations.
In general, we tend to favor alternatives sources of return, such as high yield bonds, floating rate bonds, gold, real estate, and convertible bonds, as we believe the risk / reward trade-off is more favorable in those asset classes.