This market “rally” was something we can say that no one saw coming. U.S. markets rallied nearly 7% from the lows of Tuesday night to the close on Wednesday. The Dow had its best week since 2011. This is yet one more example of why we usually tell clients to not try and time the markets.
The rally however was not as much of a rally as some seem to think. A well-diversified portfolio didn’t see the gains you might expect. While the Dow Jones and Small Cap Indices hit all time highs, many equity and bond markets were sold off as traders repositioned assets based on what they perceive a Trump victory will mean on the global economy. Asset classes such as emerging markets, European stocks, commodities, alternatives, emerging market bonds, European bonds and most U.S. bonds sold off sharply from Wednesday to Friday after the election. Utilities and consumer staples were also down. Facebook, Amazon, Netflix, Google. All down. Bonds suffered their worst week in over 3 years as the yield on 10-year treasuries surged and more than $1 trillion was erased from bond values.
Still, though, the collapse that some were worried about and others were rooting for has not taken shape. It seems much of Trump’s focus is going to be on possible de-regulation and infrastructure spending. Time will tell. Time will also tell if these things will help the economy and the markets. But we may not know until the next President is in office. Many financial policies take years to take shape and make their effects known. It is highly likely we could have a recession during Trump’s term. Whether it will be his fault or whether it is just the cycle of the economy will be an argument for the economists.
It is important to remember that diversification helps minimize the volatility in a portfolio but there are short periods where it doesn't work as effectively as we like but over the long-term diversification is a must. Making investment decision should never be based off one week, regardless of how bad it is and one must always focus on the big picture as investors in the market are not day traders and have a longer outlook then 1-2 weeks.
The rather quiet volatility environment we saw over the summer has ended and we are once again facing fragile markets that will likely respond to every piece of news. Every political appointment and every time Trump speaks will be an opportunity for the markets to react.