S&P 500; US Indexes Fundamental Forecast – November 8, 2016

U.S. equity markets recovered more than half of their recent declines on Monday as investors reacted positively to the news that the FBI had cleared Democratic nominee Hillary Clinton over her use of a private email server.

This news created huge demand for higher-yielding assets as it likely paved the way for a win by Clinton over her rival Donald Trump. Clinton is seen as the front-runner and the “status quo”. Trump is “The Unknown”.

Clinton represents business as usual and Trump, change. Investors don’t like change so Trump makes them nervous. Fear that Trump was closing the gap between the two candidates triggered a massive sell-off last week, but yesterday’s news helped investors recover more than 50% of the sell-off.

In the cash market, the benchmark S&P 500 closed at 2131.52, up 46.34 or +2.22%. The Blue Chip Dow closed at 18259.60, up 371.32 or +2.08% and the Tech-based NASDAQ Composite finished at 5167.16, up 120.79 or +2.39%. Finally, the popular December E-mini S&P 500 Index ended at 2129.00, up 49.00 or +2.36%.

The rally can best be described as a political-relief rally. If Clinton wins, investors will shift their focus on Fed policy. If Trump wins, the focus will be on risk-control.

Forecast

Despite the strong rally on Monday, the trend remains down in the major indices. However, momentum has shifted to the upside. The upside momentum is likely to continue to boost prices if Clinton wins. If Trump wins then look for a steep decline.

A Trump win will be as surprising as the Brexit vote, however, I don’t expect to see the same reaction. Sure, stocks will go down along with the U.S. Dollar and gold and the Japanese Yen will rally, but these markets will stabilize after a while as investors get used to the idea of a Republican president.

Besides the presidential election, the markets are also likely to react to the Congressional elections. If the Democrats win control of Congress then financial and healthcare stocks could suffer because they want to see reform. If the Republicans win then it will be business as usual. This reaction could be seen on Monday with financial and healthcare leading the way as news broke that the Republicans were likely to hold on to Congress.

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