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Market Rally Stalls, Investor Sentiment Sags as Trump Era Begins

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At noon (Eastern time) on January 20, 2017, Donald John Trump took the oath of office, becoming the 45th president of the United States. Since the close of Election Day, November 8, 2016, the S&P 500 index gained 5.8% through the close on Thursday, January 19. Per Schaeffer’s Investment Research, average post-election return for the S&P 500 is 0.44%, dating back to 1937, when Inauguration Day was moved from March 4 to January 20. Over the 20 election cycles since then, the S&P 500 has risen 65% of the time post-election and the average gain in the “up” years is 4.3%, so the rally we have seen since November 8 is above average.

However, the “Trump Rally” has taken a bit of a pause in the days leading up to Inauguration Day. Over the 10 trading days through January 19, the S&P 500 was down five of those days. In addition, the Dow Jones industrial average fell five straight days through January 19.

Matching the decline in stocks in recent days is investor sentiment. This week, the AAII Sentiment Survey showed that bullish sentiment, expectations that stock prices will rise over the next six months, fell 6.6 percentage points to 37.0%. This is the lowest level since the election, specifically since November 2, 2016, and is the first time in 11 weeks that bullish sentiment is below the historical average (38.5%). The drop in optimism also ends the streak of nine consecutive weeks with bullish sentiment above 40%, the longest such streak since October 15 through December 10, 2014.

Schaeffer’s also examined the performance of the S&P 500 post-inauguration since 1936. Their research shows that when the index has been up at least 4% from Election Day through Inauguration Day, it has averaged a gain of 6.4% over the next six months for the six times this has happened since 1936 and has averaged a gain of 9.9% over the remainder of the year.

The historical data is also encouraging as to what election-to-inauguration returns mean for the following four years. Schaeffer’s shows that the S&P 500 has a 10.0% annualized average return when the index is up at least 4% after the election. Looking at the limited sample size of six instances, five of the six returns over the following four years have been positive.

Obviously, only time will tell what will occur with the U.S. stock market in the coming weeks and years. In the near term, it is probably safe to assume that there will be uncertainty as President Trump begins to lay out his agenda. Usually, uncertainty leads to increased volatility. In the longer term, Trump’s policies may have a significant impact on U.S companies and the overall economy. There are also worries about valuations and the impact that a strong dollar may have on corporate earnings, especially those of multinationals. Lastly, there is the role of the Federal Reserve and the magnitude and timing of future interest rates.

As investors, we mustn’t be swayed by near-term volatility and uncertainty. Having a well-defined, long-term investment plan will see you through such periods without letting emotions drive you to make poor decisions. That is the focus of the SSR investment approach, which has allowed it to outperform the market over the last 15 years.

Wayne A. Thorp, CFA
Senior Financial Analyst, AAII
SSR Investment Committee

 

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The Stock Superstars Report (SSR) publication was developed to educate individual investors on how to build a stock portfolio using a mix of strategies. The SSR is designed to provide all the information you need to manage a stock portfolio as well as to teach you about timely investment principles relating to the SSR portfolio and stock investing in general.

 

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