The Market: January 2017

I’d like to wish all of you a happy, healthy, and prosperous new year. 

Promises of Tax Cuts and More Government Spending

2016 is gone and with it the tensions surrounding the US election. My guess is that the old saying that “one campaigns in poetry but governs in prose” is likely to hold true. 

The President-Elect has promised tough trade, reduced regulation, tough immigration, repeal ACA, lots of infrastructure spending, and lots of tax cuts.  We will see as the year unfolds how many of these campaign promises will come to fruition. Political realities, unforeseen events, and the laws of economics turn election poetry into governing prose. 

The stock market has had a good run since the election. That is based on the hope that tax cuts and increased government spending will lead to higher corporate profits and more money in the pockets of consumers with which to buy more goods and services. 

As an aside, it will be interesting to see if concerns over deficits and debt which were used by Congressional Republicans as a rallying cry in their efforts to thwart spending by the Obama Administration will fall away now that one of their own is in the White House.

Financial Markets Rally Post-election

Back to the markets.


The financial stocks led the post-election rally on not only hopes of better economic growth but also on the belief that the Trump Administration will pull back many of the more restrictive provisions of the Dodd-Frank Act. 

In fact, 25% of the advance in the Dow Jones Industrials was due to the performance of Goldman Sachs.  This might give some pause to the euphoria knowing the advance is not as broad as what has been publicized.

Absent from the rally was technology and healthcare.  Perhaps a sign of caution.

If corporate profits and overall spending is going to increase, one would think technology stocks would respond.  While I believe stock prices will rise, these inconsistencies remind me that caution is in order until we see the prose of this administration.


Stocks were not the only asset class that moved post-election.  Bonds went from being a top performer to ending the year with losses.  The move was significant.

The 10-year Treasury yield went from a low of 1.79% on November 4th to 2.45% at year-end.  This increase translated into 10-year bond prices declining by about 5%. That’s a large move in two months – especially for an asset class considered by many (I feel incorrectly so) to be a stable one.

Bonds have had a tremendous run since Central Banks the world over embarked on “extraordinary measures” to combat the global slump.  Bonds are over-owned by institutions and the public. This makes for jittery investors and big downside potential should bearish news develop and holders run for the exits.

Bond Funds

We saw an impact on bond funds, as well. As an example, the Vanguard Total Bond Market Index Fund was up 5.3% on November 4th and finished the year up 2.39%.

Should interest rates continue to rise in 2017, the conversation may not be focused on stocks but rather on sharp declines in bonds.

— Ian Green, Pendragon Capital Management

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Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.