Death of the stock market exaggerated

19 December 2016

Death of the stock market exaggerated

Early in November, there was only one story in town as far as stock market investors were concerned – the US presidential election – and it was chaos.

Late in October, the tightening of the Presidential race, and new developments in the Federal Bureau of Investigation (FBI) probe into Hillary Clinton’s emails, helped tip the US indices to an October fall. The S&P 500 eased a further 2 per cent in the first week of November, but by Election Day, it was back in the black.

And then the United States voted – and things started to turn strange.

Death of the Stock Market Exaggerated

As America went to the polls, Bridgewater Associates – the world’s largest hedge fund – sent a note to its clients predicting that the Dow Jones Industrial Average could plunge nearly 2,000 points in one day if Donald Trump were elected president. Such a fall would qualify as the biggest one-day points slump in stock market history, more than double the 777-point plunge that happened on October 29, 2008, at the height of the panic surrounding the GFC.

If borne out, that drop would equate to a 10.4% dive, immediately sending the stock market into correction territory, and wiping out nearly US$1.9 trillion ($2.5 trillion) in value from investors’ portfolios.

That was Tuesday morning, when a Trump win seemed unthinkable. But later that night, when the counting showed state after state falling to the Republican candidate, markets did indeed plunge. As US election Tuesday turned into Wednesday, and it became clear that Trump had won, the futures market versions of the Dow Jones Industrial Average, S&P 500 and Nasdaq Composite indices were each down 4.5 per cent–4.6 per cent, and almost reaching levels identified as ‘limit down’ – the maximum allowable fall in a futures contract in a trading day.

In the early hours of Wednesday, economist Paul Krugman – a Nobel Prize winner in the field – predicted the stock market would “never” recover from the losses caused by Trump’s presidential victory. “We are very probably looking at a global recession, with no end in sight,” he added.

Trump no Problem, say markets

US investors waking up on the Wednesday and reading those comments would have seriously feared for their retirement accounts. Fortunately, the eminent Professor Krugman did not have such a good handle on the markets: after being down more than 820 points in its overnight futures market alter ego, in the actual Wednesday session the Dow Jones briefly surged above its all-time closing high, before ending the day up about 257 points, and just a few points below its record close. The Dow Jones, S&P 500 and the Nasdaq Composite all rose by more than 1 per cent.

It was largely the same across the Atlantic. On Election Tuesday, Deutsche Bank warned clients that a Trump win would see a plunge of up to 10 per cent – an instant correction – in the pan-European STOXX 600 Index (versus a rise of about 5 per cent in the event of a Clinton victory). The STOXX 600 did open 2 per cent lower on the Wednesday, but recovered to close 0.6 per cent weaker.

In Asia on the Wednesday, watching the election results, Japan’s Nikkei index sank by 5.4 per cent. The next day, the Nikkei more than recouped that loss, ending 6.7 per cent higher, for its biggest daily percentage gain since mid-February.

For all the panic, it was as if the markets heard Trump’s humbled acceptance speech and its plans for infrastructure-driven stimulus and slashed US tax rates and thought, “you know what? Pro-growth policies, after all, are pro-growth policies”. Investors who bailed out of stocks and hedged against further falls had no choice, when markets rebounded, but to buy back immediately.

In short, it was the June-July Brexit slump-then-rebound all over again.

November ends strongly

So from baleful warnings of market slumps and permanent recession, at the end of November, the Dow Jones was staring at a 5.9 per cent gain, the S&P 500 was up 3.7 per cent for the month and the Nasdaq Composite Index was 2.8 per cent to the good.

In Europe, the STOXX 600 advanced for the first month in three, up 0.9 per cent, driven mainly by the CAC40 in Paris, which edged 1.6 per cent higher: the DAX in Frankfurt ended 0.2 per cent lower, and the FTSE-MIB in Milan eased by 0.8 per cent. In London the FTSE-100 lost 2 per cent over November.

In the Asia-Pacific region, the Nikkei added 5.1 per cent for the month, while the Hang Seng in Hong Kong gave up 0.5 per cent and the Shanghai Composite Index added 4.8 per cent. In Australia the S&P/ASX 200 index gained 3 per cent. 

By month’s end, market worries had moved on to Italy’s early-December referendum, which was on constitutional matters, but carried much wider significance because the proposed reforms were seen as signature policies of Prime Minister Matteo Renzi, who promised to resign if the reforms were voted down – an outcome seen as a possible precursor to a broader campaign to follow the United Kingdom out of the European Union.

When the political shock of the US election subsided, the markets could return their attention to US economic growth strengthening on the back of positive economic data. New orders for US manufactured capital goods rebounded in October, driven by rising demand for machinery and a range of other equipment. US retail sales surged by 0.8 per cent in October.

The release of minutes from the latest Federal Reserve meeting showed that the Fed appeared confident, heading into the election, that the economy was strengthening enough to warrant an interest rate increase – with December considered likely.

Elsewhere, Japan’s GDP grew by an annualised 2.2 per cent in the September quarter, better than expected, the third successive quarterly rise. China’s National Bureau of Statistics reported industrial production rose by 6.1% in October and retail sales were 10% higher year-on-year in October.

Late in the month, the Organisation of the Petroleum Exporting Countries (OPEC) reached its first agreement to cut oil output since 2008. OPEC members agreed to cut production by 1.2 million barrels per day from the current 33.6 million barrels. This represents about 1 per cent of global production.

The cartel only produces about one-third of the world’s oil supply these days, but non-OPEC oil producers are expected to cut an additional 600,000 barrels a day – about half from Russia. OPEC members said they were targeting prices as high as US$55 to US$60 a barrel. That would boost petroleum-dependent economies, which have struggled through two years of weak prices, often sinking below US$50 a barrel.

Comments 1

Aaron Gray
Jack Lowenstein - 19 December 2016

Without sounding smug, what this highlights is that it is frequently safer to react to the market's reaction to unexpected events than try to anticipate them. This approach meant that although we were as surprised as anybody else at Brexit and the Triumph of Trump we actually managed to have good months in June and October.

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