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Equity Update – Domestic Equities Update A strong dollar eroded some corporate earnings as U.S. companies with offshore revenue found it tougher to generate profitable sales. The U.S. dollar has been moving higher against most developed and emerging currencies in anticipation of a rate rise before year-end.

The energy sector, which currently represents 7.3% of the S&P 500 Index, has been a significant distracter of earnings for equities. With continued low oil prices, earnings for energy companies have also fallen, making earnings for the S&P 500 look dismal. Optimistically, when stripping out energy sector earnings, the rest of the S&P 500 sectors are roughly unchanged.

U.S. banks reported stronger than anticipated quarterly earnings as trading helped banks keep profitable. Recent contentions surrounding banking practices might lead to reformed legislation for banks, disallowing them of some activities that have added to their profitability.

More equity analysts are not just looking at company earnings to determine stock valuations, but are also eyeing interest rate levels and how much cash is being returned to shareholders.

Recent divergent stock sector performance is being caused by the anticipation of rising rates, earnings, and mergers. Assets moving from one sector to another (known as sector rotation) is also being induced by the coming rate rise and earnings expectations. Sources: S&P, Bloomberg

International Update

British Pound At Lowest Levels Since 1985 – Currency Overview The pound traded at its lowest levels versus the dollar since 1985, off 22% from its June high before the Brexit vote. The pound’s strength has become incredibly contingent on the outcome of Brexit, placing tremendous pressure on the currency at a critical time.

There has been a steady descent in the pound since the vote. Markets are concerned that as Britain plans its exit, which is expected to happen in the next two years, it will dramatically hinder the financial and banking sectors. The reason is that exports of British products to the EU might be severely limited once the exit has taken effect. Britain’s current prime minister has expressed priority in limiting the influx of immigrants into England from the EU. This stance could very well become a significant issue with the EU, since not allowing immigrants from the EU the rights out to access Britain would surely threaten Britain’s ability to trade and travel freely throughout the EU. The most vulnerable sector to such retaliations are the financial and banking sector, which heavily rely on free movement of employees throughout the various country’s in the EU. The financial and banking sector accounts for 12% of Britain’s GDP, a considerable portion of the economy.

Since Britain’s economic future has become contingent on the outcome of Brexit, the IMF downgraded its growth forecast for the country, predicting that the British economy will only grow a paltry 1.1% in 2017. Source: IMF, Bloomberg, Reuters

Currency (comparative)
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Fixed Income Update – Global Bond Markets
Money market fund reforms took effect on October 14th, which indirectly led to an increase in short term rates. A key lending rate known as the Libor (London Interbank Offered Rate) rose to 0.87%, a rise from 0.32% a year ago. It is expected that some variable mortgages indexed to the Libor might start to see increases.

Brazil’s central bank cut its key lending rate in October for the first time in 4 years. The monetary policy committee cut its benchmark rate by 25 bps to 14% from 14.25%.

Yields on U.S. corporate and government bonds rose in October, as a rate rise sentiment impeded any rise in bond prices. The 10-year U.S. Treasury yield rose from 1.60% at the end of September to 1.84% on October 31st. Short term government rates have also risen recently, with the 2-year Treasury note edging up to 0.86% as of October 31st. The slight upward shift in both short-term and long-term rates is indicative of a shift up in the yield curve, meaning that an overall change in rates is occurring.
Sources: U.S. Treasury, Fed, Bloomberg

Interest Rates
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2016 Election Results The financial markets embraced a Trump victory, sending stock prices to higher levels following a nine day consecutive decline in anticipation of uncertain election results.
U.S. Treasury yields rose dramatically with the expectation that a Trump presidency along with a Republican controlled Congress will inevitably ramp up government spending in order to boost economic growth. During the campaign, Trump was very critical of the Federal Reserve not acting to raise rates soon enough, insinuating political influence.
The Republican win in the Senate and House along with a Republican president means that legislation and laws will flow much more quickly through Congress, rather than running into stalemates as with a divided Congress.
Trump and many republicans have been calling for a rollback of various laws and regulations put in place during the Obama administration. A focal regulatory act is the Dodd-Frank Act, put in place following the financial crisis of 2008/2009, creating immense regulatory costs for the banking sector.
Ratings agency Standard & Poor’s affirmed the investment-grade ‘AA+/A-1+’ rating of U.S. government debt, a day after the presidential election, while maintaining its stable outlook. The agency stated that it will “assume the longstanding institutional strengths and robust checks and balances of the U.S. that will support policy execution in a Trump administration, despite the president-elect’s lack of experience in public office, which raises uncertainty on policy proposals.”

The following are expected to be affected by policies and regulations set into place by a Trump presidency and the Republican controlled House & Senate:

Fiduciary Rule During the election Trump did present the idea of perhaps reversing the fiduciary standard that has just recently been implemented by the department of labor.
Tax cuts for individuals and corporations Both Trump and the house Republicans have been pushing for tax reform plans that would lower individual and corporate tax rates. Trump has proposed reducing the corporate tax rate to 15% from the current 35%.
Health care reform including the possible dismantling of Obamacare The modification if not dismantling of Obamacare was a key theme with Trump’s campaign.
Trade and exports Foreign countries with trade agreements in place with the United States are concerned that Trump’s presidential victory might lead to an upheaval of existing trade and economic arrangements. The North American Free Trade Agreement (NAFTA) has been a primary target of Trump.
Infrastructure A Trump presidency, as well as a Republican controlled Congress, has set the stage for increased government spending as well as increased spending on infrastructure starting in 2017.
Defense contractors Historically, Republican leadership has usually been supportive of defense spending.
Coal industry During his campaign, Trump voiced his support for the U.S. coal industry and China’s pursuit of the industry.
Oil and natural gas drillers During the campaign, Trump reiterated his support for the oil and natural gas industry, perhaps curtailing various regulations inhibiting further growth and industry profitably.
Pharmaceuticals & Biotech Hindered by Obamacare and recent regulations, Trump has proposed scaling back pricing regulations.
Banking Industry Should Trump and the Republican controlled Congress decide to alleviate current regulations such as Dodd-Frank, the regulatory environment would become less inhibited for U.S. Banks to generate profits and loan money to consumers. A rising interest rate environment is always beneficial for banks.
Market performance following presidential elections have varied over the decades, however, Trump’s affect on the S&P 500 Index of 1.11% was one of the best for both Democratic and Republican presidential victories ever. Obama’s win in 2008 saw the largest drop of -5.27%, while Reagan’s victory in 1980 saw the largest gain of 1.77%. Sources: S&P, Moody’s, Reuters. Bloomberg