Randy Frederick, managing director of trading and derivatives at Schwab
Vice President of Trading and Derivatives
Randy focuses primarily on client education and market analysis. He is a frequent guest on CNBC and Bloomberg TV.
The Election's Over, So What's Next for Markets?
November 14, 2016
MARK RIEPE: Hello and welcome to the Schwab Market Snapshot for November 14th, 2016. I'm Mark Riepe, sitting in for Randy Frederick. Joining me this week is Liz Ann Sonders, our chief investment strategist. Welcome, Liz Ann.
LIZ ANN SONDERS: Thanks, Mark. And thanks for tuning in, everybody.
MARK: So, Liz Ann, we've seen markets on a bit of rollercoaster post-election, but not only that, during election night, itself. What do you think were the factors that have been driving that kind of volatility?
LIZ ANN: Well, it was a wild ride, and most of it, actually, occurred overnight on election night. I think, in general, you could argue that the fact that the market sold-off in a knee-jerk fashion very, very quickly because of the surprise win by Trump—but then started to rally—is somewhat in keeping with what we've seen in history when you've gotten these crisis events or big surprises. Most recently being an example like Brexit. The fact that it was condensed in overnight and you didn't even get to the open before the market had sort of found its level and picked back up, but that general pattern of a knee-jerk negative response and then a rally back, I think reflects—unless these events turn into long, protracted economic negatives—the market has found stability in short order, and that was certainly the case this time.
MARK: So, clearly, the election has been dominating the headline since last Tuesday, but longer-term factors like earnings and valuation are ultimately what drive stock prices. So as you survey kind of the post-election landscape, where do we stand on those sorts of fundamental factors?
LIZ ANN: Well, I agree with you. It seems like a long time ago where we actually cared a lot about fundamentals, we've been so focused on macro issues, geopolitical and otherwise. But the good news is, is even before the election, third quarter looked to break the string of what had been five quarters in a row where S&P 500 earnings were negative in year-over-year territory, and we move back into the positive category in third quarter. And expectations for calendar year 2017 are pretty comfortably in double-digit return mode. Valuations, in turn, have improved, as well, because if you look at a traditional PE ratio, when you have the E appreciating at the same time, also, price has been going up, but E has been going up—you actually have slightly better valuations.
Now, there is a risk looking into 2017, though. Part of this story that we're all digesting here right now—and we're certainly seeing it in the bond market—is a higher inflation outlook into 2017. And that does matter for valuations. The idea is that in low inflation, earnings are more valuable. So in a low inflationary environment, PE ratios tend to be higher. When you start to see increasing inflation, earnings become less valuable, so PE ratios tend to go lower. So that is something we have to be mindful of looking into 2017. That even if earnings growth stays fairly robust, if inflation picks up, the market may be less willing to pay those higher multiples.
MARK: So another big theme that's been coming out of the election has been the ascendency of fiscal stimulus. Let's assume for the moment that that becomes a reality in 2017. To what extent is that going to have an impact on, let's say, the deficit, the economy and ultimately, the market?
LIZ ANN: So I think there's no question it's going to have an impact. If, as we're spending a lot of time focused on now, if we do see a big infrastructure stimulus package, at the same time some of the tax cuts—either just on the corporate side or across the board, even, on the individual side—those may be very good boost to the overall economy, but would unquestionable increase the deficit. The deficit is down to less than 3% of GDP, but as that starts to creep up again, given the fact that we've still got high debt and debt that is still rising—remember debt is a cumulative effect of running deficits—I think that may start to become a problem, and may already be reflected in what we're seeing with bond yields having picked back up. So I would expect to see the deficit hawks within government, and maybe also by market participants, start to squawk a bit more in 2017, as we look at the potential for a significant increase in the deficit.
MARK: Great perspective, as always, Liz Ann. That's it for today. If you would like to hear more from Schwab, you can find our material at Schwab.com/Insights, or you can follow us on Twitter @SchwabResearch. You can also follow Liz Ann on Twitter. Her handle is @LizAnnSonders. I'm Mark Riepe. Randy Frederick will be back next week. Thanks for watching.
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