STOCKS RALLY ON TRUMP VICTORY -- FINANCIALS, HEALTHCARE, INDUSTRIALS, MATERIALS, AND ENERGY HAVE BIG GAINS -- STOCKS TIED TO ALUMINUM, COPPER, STEEL, AND COAL SURGE -- 10-YEAR TREASURY YIELD SURGES ABOVE 2%
STOCKS SURGE AFTER WEAK NIGHT... Today's strong stock market builds one surprise on top of another. The first surprise was a Trump victory. The second is today's sizable stock market gain. It was widely expected that a Trump victory would push stocks sharply lower. And it did for awhile. At one point last evening, Dow futures dropped 800 points. A sharply lower open was expected this morning. Instead, stocks opened flat and have rallied from there. While I'm hesitant to apply rational analysis to today's action, I will show some charts that describe what's happening. First of all, stock indexes are sharply higher. Chart 1 shows the Dow Jones Industrials trading 300 points higher and at a three month high. Chart 2 shows the S&P 500 also climbing back above its 50-day moving average. Small caps are showing bigger gains of more than 2%. More telling action, however, is taking place among market sectors. Financials are up 4% on a surge in bond yields to the highest level since January. They're being led by banks, brokers, and life insurers. A big jump in biotechs and pharmaceuticals is pushing healthcare sharply higher. Industrials are being pulled up by heavy construction and defense stocks. Materials are being led higher by big rallies in steel, aluminum, and copper shares. Coal is leading a rally in energy. Surging bond yields (and tumblng bond prices) are pushing dividend-paying stocks like utilities sharply lower.
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Chart 1
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Chart 2
BOND YIELDS SURGES ABOVE 2%... Another big surprise is a nearly 20 basis point jump in the 10-Year Treasury Yield putting it above 2.00% for the first time since January (Chart 3). Treasury bond prices are sharply lower. As usual, bond proxies like staples, utilities, and REITs are falling. Financials are surging with bond yields. Some of the money coming out of bonds is finding its way into economically-sensitive stocks. The most convincing explanation for the surge in bond yields is the belief that more infrastructure spending would boost the economy and bond yields along with it. That explains the buying of heavy construction stocks. That's also boosting commodities tied to construction like aluminum, copper, and steel and stocks tied to them. Rising commodity inflation is also boosting bond yields. Chart 4 shows the Materials Sector SPDR (XLB) climbing more than 2% today. Stocks tied to coal are leading the energy sector higher. That's most likely due to the view that the new president would be supportive to the coal industry. Rising bond yields are hurting stocks tied to bonds. That explains today's -3% drop in utilities (Chart 5).
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Chart 3
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Chart 4
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Chart 5
VIX INDEX TUMBLES ... Another encouraging sign is today's plunge in the CBOE Volatility (VIX) Index. Chart 5 shows the VIX tumbling 21% today to 15. Just a week ago, the rising VIX Index was issuing a warning for stocks. Today's plunge is sending the opposite message. I'm reluctant to base too much on one day's market action, especially the day after a close election. Today's market reactions, however, are sending a more optimistic message. We may get our yearend seasonal bounce after all.
