The healthcare and financial sectors rallied after the election due to an expectation of less or reduced regulation with the incoming administration. With Republican control of both the White House and Congress, investors expect accommodative legislation being passed. Investors also expect that the economy may benefit from looser fiscal policy and increased infrastructure spending. It is uncertain whether the new administration will pursue more restrictive international trade agreements. Since small-cap and mid-cap companies generate a larger percentage of their business from U.S. consumers, their revenue is less dependent on international trade, thus the uncertainty in international trade has less impact on them.

Expectations of higher spending and less regulation are among the main reasons why bond investors have sold U.S. Treasuries to buy stocks. The general bond market is also concerned about whether the U.S. can afford all of expected spending along with possible rising inflation. We slightly cut our position in the iShares 10+ Year Credit Bond Fund ETF (CLY) to manage this risk. However, we still believe that the corporate bond market has a relatively low default rate given the current market conditions and remains fundamentally attractive. Also, with a current yield of 4.3%, the position boosts income to the portfolio. With the recent price decline, our valuation indicator remains strong for the holding.

Our global tactical asset allocation (GTAA) model indicated a relatively bullish investment level for the overall U.S. equity market while the valuation for large-cap equities are a bit less attractive compared with their mid and small-cap counterparts, along with equity ETFs in some other regions such as the Eurozone, United Kingdom and emerging markets. How well the market and economy hold up in the coming year will partially depend on articulation and implementation of economic policies by the new administration. On the negative side, Trump's anti-immigration stance could be a problem for U.S. technology companies, which attract a lot of talented foreign workers. In the long term, negative supply-side effects—particularly via increased trade protectionism—are a potential concern for the economy’s growth potential.  

We are currently neutral on iShares Core MSCI Emerging Markets ETF (IEMG) and overweight iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB). While we realize that the potential of trade protectionism may present some headwinds for emerging market equity, the economies in the area remain broadly positive for IEMG. Global commodity prices have stabilized and China’s October data showed that their economy was on track to meet the government’s target for growth in 2016. We are closely monitoring policy developments in the U.S. and its potential impact on emerging markets. We are currently overweight EMB and consider the current yield of 5% attractive income for the portfolios. However, we realize that risks remain in several aspects: 1) our model is showing lower sentiment signals, 2) the model is also showing that valuation is tightening, and 3) there is potential appreciation of the U.S. dollar given the expectation of higher interest rates. We are closely monitoring all the risks.                                                                                                                                                                                                                                   

The Eurozone Q3 real GDP expanded by 0.3%, matching the rate of second quarter expansion. Growth from a year earlier was 1.6%. The economy brushed off worries surrounding the U.K. exit vote (“Brexit”) and increased at a healthy pace in the three months leading into September. For the current quarter, Markit's October growth estimates showed that the currency area’s recovery is likely regaining momentum, with the composite headline index bouncing back to 53.7 from 52.6 in September. Nevertheless, risks are skewed to the downside. Italy’s referendum over constitutional changes and the banking crisis, combined with subdued lending in the euro zone, could undermine the outlook.