There's been no shortage of press regarding U.S. equity markets hitting all-time highs following the U.S. presidential election. In the weeks subsequent to the election, the S&P 500 Index rose nearly 3% as of November end, largely driven by sharp upward moves in Energy, Financial, and Industrial stocks. These highs are being driven by optimistic predictions for both the U.S. stock market and the U.S. economy, as opposed to a dramatic change in the fundamental backdrop. Despite the rally in U.S. stocks, it is notable that many asset classes were negative for the month of November.
We would describe these recent market moves as emotionally driven and detached from fundamentals. To highlight the anomalies that surfaced, consider that in November:
- The Financials sector outperformed the S&P 500 by approximately 10%, placing its excess return in the 99th percentile of monthly returns since 1989
- Value outperformed growth by approximately 3.5%, with the performance difference between the Russell 1000 Value and Russell 1000 Growth Index in the 94th percentile of monthly returns since 1979
- Yields spiked dramatically: the 10-year Treasury yield increased by 53 basis points from Election Day through the end of November, placing its move in the 96th percentile of rolling 15-day periods since 1953
These recent rotations are a signal that investors are betting that President-elect Donald Trump will successfully implement numerous pro-growth policies, despite little clarity on details or what his administration might actually accomplish. We advise selective U.S. exposure to the Energy, Financials, and Industrials sectors - and value stocks in general - due to what we view as a clear lack of broad-based fundamental support. One of the key reasons we recommend selective exposure in these areas is that we are nearly eight years into an economic cycle. Value stocks are generally cheap for a reason (e.g., restructuring, poor industry dynamics), and often need stronger/accelerating economic growth as a tailwind, such as when coming out of a recession. Economic growth, however, has been remarkably slow, and even in the event that the U.S. does experience a cyclical pickup in growth, our expectation is that growth will remain secularly challenged and within the post-global financial crisis range of GDP growth. Given this secular slow growth outlook, we do not believe that long-term tailwinds for the recent rotation exist. Regarding cyclical companies within the Energy, Financials, and Industrials sectors in particular, our view is that many of the companies that are fundamentally attractive are overvalued, whereas companies we deem attractive from a valuation perspective are not compelling on a fundamental basis.
We will continue to monitor conditions and valuations within these economically-sensitive sectors for select opportunities. Given our slow growth outlook, our investment decisions will continue to rely on industry supply and demand conditions. Though we would advocate using volatility to increase exposure to pro-cyclical sectors and stocks that stand to benefit from positive policy conditions, reasonable valuations and supportive fundamentals remain key selection criteria.
Over our 45+ year history, our investment decisions have been driven by fundamental value and individual company analysis. Our process at Manning & Napier seeks to manage risk by avoiding short-term momentum- and sentiment-driven trades. Though markets will - on occasion - be driven more by sentiment than investment fundamentals, we believe that fundamental value remains the primary driver of long-term returns and our ability to meet long-term objectives.