U.S. equities roared back from the abyss on Wednesday in the wake of the surprise electoral upset by President-elect Donald Trump over Democratic-rival Hillary Clinton. Overnight, as the returns rolled in, equity futures dropped limit down amid a repeat of the “Brexit” chaos from June: Markets recoiled in the wake of another surprise anti-establishment vote by an angry electorate.
But as the sun came up, the fear subsided. There would be no contested election, as Trump’s margins were large enough in enough states to secure a clean victory. Hillary conceded. Trump’s victory speech was conciliatory. And traders realized that Trump’s economic platform was tantamount to a huge fiscal stimulus of tax cuts and infrastructure spending.
In the end, the Dow Jones Industrial Average gained 1.4% after flirting with a new record high, the S&P 500 Index gained 1.1%, the Nasdaq Composite gained 1.1% and the Russell 2000 gained 3.1%. The dollar surged, gold lost a touch and crude oil gained 0.6% after testing below its 200-day moving average for the first time since early August.
Treasury bonds were slammed hard on a spike in inflation expectations and chatter of official selling by the Chinese. Also, the December Federal Reserve interest rate hike seems to be on track as well.
That boosted financial stocks in a big way, up 4.1% as a group, on net interest margin tailwinds. And it lifted the ProShares UltraShort Treasury (NYSEARCA:TBT) recommended to Edge subscribers by 8.2% to bring its total gain since recommended on Aug. 16 to 20.2%.
Healthcare stocks were also strong on hopes of a lighter regulatory burden on drugmakers and biotechnology names. The group gained 3.4% with Pfizer Inc. (NYSE:PFE) 7.1% after trading higher earlier in the session.
United States Steel Corporation (NYSE:X) gained 17.2% thanks to an analyst upgrade by Jefferies on post-election benefits from possible trade protectionism and increased infrastructure spending. Corrections Corporation Of America (NYSE:CXW) gained a whopping 43.1% as analysts noted possible higher demand if Trump tightens immigration enforcement; Clinton’s defeat also removed the threat of her anti-private-prison stance. Lockheed Martin Corporation (NYSE:LMT) gained 6% on a general lift in defense stocks thanks to Trump’s clamoring for an upgrade to military hardware.
On the downside, emerging markets stocks, REITs and other yield-sensitives, and clean energy stocks underperformed. GoPro Inc (NASDAQ:GPRO) fell 4.1% amid the fallout of an announced recall of the 2,500 Karma drones it has sold on reports of power failure during flight — an embarrassing misstep at a critical point in the company’s turnaround plan.
Looking ahead, a lot remains in flux. Will the surge in long-term interest rates continue to be a net positive despite the dampening effect it will have on already tepid economic growth?
Will Federal Reserve Board Chair Janet Yellen come under political pressure to resign? Will recent job gains continue? And will the surge in the dollar further pinch profit margins and weigh on crude oil at a time of vulnerability for both?
For now, I continue to recommend caution as we enter unchartered political waters.