Markets Adjust to the New Sheriff and His Crew

We’re in the midst of a very large market rotation based on several anticipated economic policy changes. Although the President-elect is not easy to nail down, his economic cabinet and other leadership choices are pointing to less bank and business regulation, lowered corporate taxes, and economic stimulus.

Bond prices are down significantly as big investors, fearing inflation and higher interest rates, exit fixed income. Stock managers are rotating out of healthcare (lingering fears of pricing pressure,) interest sensitive stocks (like utilities and REITs,) and tech stocks, just because they need cash to chase industrials and commodities, as beneficiaries of fiscal stimulus (infrastructure spending,) and banks as beneficiaries of higher interest rates (making loans more profitable.)

If we get signs that all this leads to increased economic activity, more employment and higher wages, more capital investment, and more bank lending, we think current stock prices can generally be supported. Although there may be moments of doubt and fear, given the above assumptions, we would  probably see those moments as opportunities to add to quality stocks, especially if the sector rotation continues to be so robust. However, the going looks difficult for bonds.

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