The most divisive presidential election of our time has mercifully come to a close. Now that it’s over, I’m done writing about it. I’d prefer to focus on other stock market trends—good or bad—that have nothing to do with politics.
So let’s get right to it. Here are three stock market trends to look for in the coming months once the fallout from yesterday’s election subsides in a week or two.
Stock Market Trend #1: The Long-Term Market Direction Is Still Up.
This time a year ago, the market was in between its two biggest dips in years. The S&P 500 had tumbled more than 12% in August 2015, and after recovering nearly all of those losses in October, fell even further in January and February. Since that double bottom, the index is up more than 16%, and was up even further this August and September when it touched new all-time highs.
For the year, the S&P and the Dow are both up more than 4%, while the Nasdaq has ticked up close to 3%. After a down 2015 and a terrible start to 2016, U.S. stocks are on track for a nice, if underwhelming, bounce-back.
Stock Market Trend #2: The Looming Rate Hike Is Still Holding the Market Hostage.
Before normal pre-election fears started dragging down the market a little over a month ago, stocks were stuck in a very tight holding pattern for about three months. Indeed, from the Fourth of July until Halloween, the S&P 500 didn’t dip below 2,125 and didn’t exceed 2,190—a narrow range of about 3%. The Fed had a lot to do with that uncertainty, as investors parsed their every word for signs of when they might hike interest rates again.
Chances are that will happen in December, as it did last year. And chances are, the hike will again be very incremental, probably a quarter of a percentage point. Once it happens, look for stocks to react similar to how they reacted after the Brexit vote—with a brief downturn of a few days, followed by a swift rebound. Which way they go from there will depend on what else is going on in the market.
Stock Market Trend #3: Earnings Have Bounced Back.
After five straight quarters of negative growth, profits at America’s largest companies improved 2.7% in the third quarter (with 85% of companies in the S&P 500 reporting thus far). That’s an encouraging sign, especially considering that analysts were anticipating a -2.2% collective drop-off.
No sector has grown more than real estate, with an average of 35% earnings growth. Utilities are a distant second, with 14% growth, followed by financials at 8.3%. Energy remains far and away the biggest laggard, with an average year-over-year profit decline of 63%.
The strong third quarter bodes well for the fourth quarter, when holiday sales are a good growth stimulus. After failing to grow profits in the fourth quarter last year, a return to growth this quarter could be what prevents the kind of January and February doldrums we saw early this year.
