Australian Investment Blog

Last night the Dow made all-time highs on continued optimism following Donald Trump's election victory. However it should be noted the strength was very sector specific, even the different US indices themselves witnessed diverse performances e.g. the Dow +1.2%, the S&P500 +0.2%, Russell 3000 +0.3% but the Tech. NASDAQ -1.6%. There were again some clear standouts both ways within the S&P's 11 sectors:

Winners: Financials, Industrials, Healthcare, and Materials.

Losers: Utilities, Consumer Staples, Real Estate and Technology.

The important question is what to buy for the coming months taking note that the Dow has already rallied over 5% since the election result - already achieving its usual gain after a close election.

Dow Jones Monthly Chart

We believe the markets are getting the overall thematic of anticipated significant fiscal spending, leading to inflation and higher interest rates, correct. It should be remembered that we have been targeting rising inflation and interest rates, over recent months, whoever won the election. On a fundamental basis we see more risks in one part of the two locally performing sectors:

1. Financials - We see rising interest rates and inflation which combined with a likely reduced regulatory environment courtesy of Mr Trump is bullish for Banks / Financials.

2. Resource stocks have rallied hard courtesy of anticipated inflation plus fiscal spending by the new president. However it should not be underestimated how long it will take Mr Trump to commence building a new airport for example, say 2-3 years in which time he may be close to losing his job! Hence while we agree he can start spending on strengthening his armed forces quickly which is clearly bullish for commodities, overall infrastructure takes time and big gains have already been witnessed.

Our favourite chart of a US index during 2016 has been the NYSE Composite Index, which comprises of over 2000 stocks. We remain bullish the NYSE Composite Index, as we have all year, targeting ~8% further upside.

Hence importantly as investors we remain overall comfortable buying stocks in the correct sectors especially as we know institutions are sitting on record levels of cash and are missing out on the recent gains - they will start to get very nervous about their relative performance. Simply a "Fear of Missing Out (FOMO)" rally is unfolding before our eyes.

NYSE Composite Index Monthly Chart

Unlike many people, we have been bullish Banks / Financials during 2016 hence our holdings in CBA, Westpac, and Suncorp. The obvious question is should we add to these positions, or is it time to take some profits. The S&P500 Banking Index has now rallied over 40% from the lows and is within a whisker of breaking the highs for 2015 - our equivalent was CBA trading at $96 compared to $73 yesterday illustrating perfectly our disappointing local underperformance.

We remain bullish US banks in the months ahead looking for ~10% further gains before its time to cash in.

S&P 500 Banking Index Monthly Chart

As mentioned yesterday our favourite 2 stocks within the Financial Sector are NAB and Macquarie (MQG).

1. National Australia Bank (NAB) as the cheapest local bank

2.Macquarie Bank (MQG) in Financials Sector. We feel MQG will be the big winner from the US election with potential benefits from lower taxes, infrastructure spending and overall substantial US earnings.

Summary

- We remain committed to our view that both global interest rates and inflation are set to rise over coming years. We remain bullish equities into at least early 2017.

- Our favourite bank today for the new unfolding US is Macquarie followed by NAB.

Overnight Market Matters Wrap

• The US market have finished yet again very strongly with the Dow closing up 218 points (+1.17%) to 18,808, however the S&P500 was more mixed, closing just 4 points higher (+0.2%) to 2,167. The technology sector covered by the NASDAQ was well down, falling 78 points (-1.6%) to 4,747.
• Oil slipped last night dropping 90c (-2.0%) to US$44.37/bbl after traders were hit with another rise in domestic stocks and concerns that OPEC will be unable to rally non-members to cut production in their meeting due 30th November 2016.
• Iron Ore continued its astonishing run, rising another US$3.14 (+4.4%) to US$74.12/t.
• The December SPI Futures is indicating the ASX 200 to open up 21 points higher this morning, testing the 5,350 area.

All figures contained from sources believed to be accurate. Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy. Prices as at 11/11/2016. 8.20AM.

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