Divided nation, bull market. And the clear winner is… the U.S. stock market.
The U.S. Presidential elections left the country divided between grief and elation. But the stock market, that cold, calculating, emotionless creature, powered to new heights partly on relief that the election result was quick and orderly, and partly on the hope of reduced regulations and a more favorable business climate from an incoming Trump administration.
That’s the hope. Reality, on the other hand, may prove more complicated.
Reality: One Example.
When the President-elect announced at month’s end his intentions to impose steep tariffs on Mexico, Canada and China on his first day in office, shares of U.S. and European automakers took an immediate hit; GM falling 9% the next day.
The U.S. Presidential elections left the country divided between grief and elation. But the stock market, that cold, calculating, emotionless creature, powered to new heights partly on relief that the election result was quick and orderly, and partly on the hope of reduced regulations and a more favorable business climate from an incoming Trump administration.
That’s the hope. Reality, on the other hand, may prove more complicated.
Reality: One Example.
When the President-elect announced at month’s end his intentions to impose steep tariffs on Mexico, Canada and China on his first day in office, shares of U.S. and European automakers took an immediate hit; GM falling 9% the next day.
Many automakers have built factories in Mexico to take advantage of relatively cheap labor and the country's proximity to the lucrative U.S. market, while China is a supplier of certain key components.
"If implemented, this (tariffs) would spell disaster for the U.S. auto industry and the Detroit Three, as well as Volkswagen and other European OEMs," Bernstein analyst Daniel Roeska said in a note.
Now, those tariffs may or may not come to pass. They may be the opening salvo in a bargaining game. But one thing is certain: there will be winners and losers over the next four years. And those labels will be subject to change – daily. Here’s hoping the market will learn to be less reactive and more ‘let’s see how this plays out.’ If not, it’s going to be a noisy, volatile ride.
What Else Played Into The Rally?
Strong corporate earnings, with expectations of accelerated growth in coming quarters. Nvidia’s earnings came and went with barely a blip in volatility, the takeaway being that the AI buildout remains a dominant force going forward. U.S. consumer confidence also increased during the month. And there are seasonal factors in play, i.e. mutual-fund managers, gunning for a high ranking in the year-end performance sweepstakes, are adding more risk to finish out the year strong.
Of note: the November rally broadened beyond major technology stocks, with the financials and consumer discretionary sectors taking the lead.
Are There Headwinds?
Yes, always. Chief among them going into December…
Despite these challenges, most analysts see positive momentum into the year end. Which, of course, makes me nervous. I remain fully invested, but buckled up.
And For What It’s Worth…
Crypto investor Justin Sun paid $6.2 million for a banana duct-taped to a wall. Sotheby’s auctioned off the infamous piece of work created by Italian artist and Maurizio Cattelan. Sun will get a roll of duct tape, instructions on how to “install” the banana and a certificate of authenticity guaranteeing it as an original work. – CNBC.com
As fruit is wont to do, the banana will rot and need to be constantly changed for display. In a statement, Sun said he plans to eat the banana “as part of this unique artistic experience.”
For that price, maybe the artwork should have come with twice-weekly visits from a fruit monger.
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
--David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.
"If implemented, this (tariffs) would spell disaster for the U.S. auto industry and the Detroit Three, as well as Volkswagen and other European OEMs," Bernstein analyst Daniel Roeska said in a note.
Now, those tariffs may or may not come to pass. They may be the opening salvo in a bargaining game. But one thing is certain: there will be winners and losers over the next four years. And those labels will be subject to change – daily. Here’s hoping the market will learn to be less reactive and more ‘let’s see how this plays out.’ If not, it’s going to be a noisy, volatile ride.
What Else Played Into The Rally?
Strong corporate earnings, with expectations of accelerated growth in coming quarters. Nvidia’s earnings came and went with barely a blip in volatility, the takeaway being that the AI buildout remains a dominant force going forward. U.S. consumer confidence also increased during the month. And there are seasonal factors in play, i.e. mutual-fund managers, gunning for a high ranking in the year-end performance sweepstakes, are adding more risk to finish out the year strong.
Of note: the November rally broadened beyond major technology stocks, with the financials and consumer discretionary sectors taking the lead.
Are There Headwinds?
Yes, always. Chief among them going into December…
- Geopolitical Tensions: Ongoing conflicts, such as the situation between Ukraine and Russia and the recent escalation of weaponry and range on both sides, will contribute to market uncertainty.
- Inflation Concerns: The core Personal Consumption Expenditures (PCE) price index increased in October, showing inflation pressures proving persistent. This complicates the Federal Reserve's decisions on interest rate cuts.
- Trade Policies: As we approach the switch in administrations, the repercussions of potential tariffs will begin to magnify (see example above).
Despite these challenges, most analysts see positive momentum into the year end. Which, of course, makes me nervous. I remain fully invested, but buckled up.
And For What It’s Worth…
Crypto investor Justin Sun paid $6.2 million for a banana duct-taped to a wall. Sotheby’s auctioned off the infamous piece of work created by Italian artist and Maurizio Cattelan. Sun will get a roll of duct tape, instructions on how to “install” the banana and a certificate of authenticity guaranteeing it as an original work. – CNBC.com
As fruit is wont to do, the banana will rot and need to be constantly changed for display. In a statement, Sun said he plans to eat the banana “as part of this unique artistic experience.”
For that price, maybe the artwork should have come with twice-weekly visits from a fruit monger.
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
--David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.
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