The US electorate shocked many by electing Donald Trump as their next president.  The stock markets seem happy with the result, but the bond markets have suffered a deeper selloff than we’ve seen in over a decade.

 

November 2016 Market Performance

All index returns are total return (includes reinvestment of dividends) and are in Canadian Dollars unless noted.

*Absolute change in yield, not the return from holding the security.

November was a surprisingly positive month for many stock markets around the world.  Stock markets initially reacted negatively to the news that the US had elected Donald Trump as their next president, but quickly recovered as November went on.

The S&P/TSX Composite was up +2.0% for November, its tenth positive month in a row.  The S&P500 was up +3.4% and hit several new all time highs in November.  Small cap stocks in the US performed very well, and were up 11.0% as measured by the Russell 2000 Index.  Japanese stocks also performed well and were up 5.0% for the month.  The only stock markets that didn’t perform well were those in the UK, Europe, and emerging markets.

Unlike the stock markets, bond markets did not react well to the election news from the US.  In Canada, the broad FTSE TMX Universe Bond Index was down -2.1%, its largest decline since May 2004.  All of the government and corporate sub-indexes were down for the month, with government bonds fairing the worst. US bonds were similarly negative with the higher quality bonds in the Merrill Lynch AAA and BBB Corporate Bond Indexes suffering the most.  The high yield bond indexes were mixed, those in Canada were positive, while US and global high yield indexes were negative.  Emerging market bonds ended their 6 month winning streak, finishing November down -3.8%.

Commodities were mixed in November, the two headliners, oil and gold, were -5.5% and -8.0%, respectively.  The broad Bloomberg Commodity Index was up 1.3%.

The Canadian dollar was down -0.1% against the US dollar, but gained +3.3% against the Euro.

Commentary

Never thought I would be writing this, but the US elected Donald Trump as their next president.  He’s the oldest and least experienced US president-elect, and was surprised to learn the full extent of the job after meeting with President Obama.  His full policy platform is still fuzzy, and he already seems to be backing away from his craziest ideas.

With all of the uncertainty around his presidency, the financial markets reacted negatively after it became clear that the west coast states were not going to be enough for Hillary to win the presidency.  Overnight the stock markets in the US were down around -6%, but when they opened on November 9 the losses were much less severe, and since then the S&P500 has been regularly hitting new all-time highs.

The bond markets on the other hand have reacted negatively to the election results.  Trump has proposed spending a trillion dollars on infrastructure, nearly all of which would need to be borrowed, adding to the massive US debt.  All of this additional borrowing is expected to raise inflation rates in the future which would imply higher interest rates, hence the selloff in bonds.  Trump has also made comments in the past about borrowing money for his casinos and real estate businesses with the expectation of getting a discount on the repayment; that is he, fully expected that he would not have to repay the full amount borrowed.  That is not something bond investors like to hear, and it adds the possibility that there may be more credit risk in US bonds than previously believed.  Hopefully that is just another of his off the cuff remarks that he will back track from.

One of Trump’s biggest promises was to bring back manufacturing jobs that went overseas or to Mexico.  To help achieve that, he has proposed to end trade agreements like NAFTA, as well as impose tariffs on countries such as China.  You can understand how that would appeal to those in the so-called rust belt states that have been hardest hit by manufacturing plants leaving for lower cost countries.

But what Trump is unaware of (or neglected to mention) is that it will be extremely difficult to bring those jobs back and putting in trade barriers will be really hard on American families that have become accustomed to buying low cost goods made overseas at Walmart and other big retailers.

Trump has called for Apple to make their products in the US, but some studies have shown that the cost of an iPhone would almost triple if all the components were made in the US and the final product was assembled there.  The other issue is that a lot of the manufacturing processes are repetitive and have become and more and more automated over the years as automation has become more and more cost effective.  A report from Boston Consulting found that it costs $8 an hour to use a robot to spot weld in the US auto industry, compared to $25/hour for a worker.  In 1980 it took 25 jobs to generate $1 million in manufacturing output in the US; today it takes on 5 jobs.  Those jobs aren’t going to be coming back

It should be an interesting four years as Trump realizes that everything he has promised will be difficult or impossible to achieve.

 

October Economic Indicator Recap

Below are the current readings on the major economic indicators: central bank interest rates, inflation, GDP and unemployment.

Below are the current readings on a few other often followed economic indicators: retail sales and housing market metrics.

A Closer Look at the Canadian Economy

Canada’s unemployment rate was unchanged at 7.0% in October despite 43,900 jobs being added; 23,100 full time jobs were lost and 67,100 part-time jobs were added.  The rise in the labour force participation rate offset the job creation to keep the unemployment rate unchanged.

Housing prices across Canada rose 0.3% in October, but were not broadly based according to Teranet.  Hamilton (+1.4%), Toronto (+1.2%), Quebec City (+1.1%), Calgary (+0.5%), and Winnipeg (+0.4%) all posted monthly gains that were above the national average.  Montreal was the laggard at -1.0%.  Vancouver saw its first decline in 22 months, at -0.6%.

The number of new housing starts rose slipped -12.1% to 192,900 in October. Building permit activity in September slipped -7.0%.  We usually confine this discussion to Canadian stats, but we were shocked to see US housing starts rise 25.5% for the month, to the highest level since August 2007.

Inflation was slightly positive in October at +0.2%.  On an annual basis, the inflation rate was +1.5%, and remains under the Bank of Canada’s target rate of 2.0%.  Core inflation which excludes more variable items such as gasoline, natural gas, fruit & vegetables and mortgage interest was +1.7% for the last year, the lowest reading in almost 2 years.  Retail sales were up +0.6% in September, driven primarily by auto sales.  Excluding auto sales, retail sales were flat for September.  Compared to a year ago, retail sales were up +2.5%.

GDP was up 0.3% month over month in September, or +3.5% annualized.  While all economic sectors posted gains in September, most of the growth was again attributed to the mining and oil & gas sectors.

No Bank of Canada meetings in November, the next BoC meeting is on December 7.

 

*Sources: MSCI, FTSE, Morningstar Direct, Trading Economics