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Post-Election Rotation: Trump Bump and Dump

In the weeks leading up to the November 8 presidential election, we noted that, in the event of a surprise result, investors should expect a quick reallocation of resources into sectors and industries expected to benefit from differing policy positions. Well, many would say that the November 8 outcome was a surprise, with Donald Trump besting Hillary Clinton to become the 45th President of the United States.

The stock market started reacting to a Trump presidency on election night, even before he was declared the winner. Stock market futures first plunged as returns came in favoring Trump, but rebounded as Trump’s victory speech struck a much different tone than did much of his prior campaign rhetoric. The day after the election, U.S. markets jumped and have been undergoing a rally pretty much ever since.

However, not all sectors or industries have benefited from a “Trump Bump” in the days following the election. According to The Wall Street Journal, investors have been shifting their money in the days since the election based on expectations of stronger growth and higher inflation during a Trump presidency. Bank shares have surged on expectations of rising interest rates, which would widen the gap between what banks pay on deposits and what they charge on loans, thereby boosting profits. Bank stocks have also risen on the likelihood of reduced regulation from a Trump administration. Infrastructure and transportation firms have also been on the rise since Election Day, based on promises Trump made on the campaign trail to rebuild America’s roads and bridges.

At the same time, there has been a sell-off in utilities, telecommunications companies and REITs—which have been popular sources of steady income in the current ultralow interest rate environment—on the prospects of higher interest rates.

Technology shares have also lagged since the election, although the reasoning behind the lag isn’t quite as clear-cut. The technology sector was already viewed by some as overvalued before the election, lowering the stocks’ upside potential. In addition, some analysts believe that investors have been cashing in on their gains in tech stocks in order to buy relatively more attractive sectors, such as financials. Furthermore, Trump’s calls for tighter trade restrictions and immigration policies have weighed on tech companies, which tend to sell a large percentage of their products overseas and rely on highly skilled foreign workers. It is worth pointing out, however, that one policy Trump did promote during his campaign was to allow companies holding money overseas to repatriate it.

Since the close on November 8, the day of the election, seven of the 11 S&P Select Sectors ETFs are up through Friday’s close. Four are down over that period: Utilities (XLU: -5.9%), Consumer Staples (XLP: -4.2%), Real Estate (XLRE: -3.2%) and Technology (XLK: -0.1%). Three of the four are down for reasons we highlighted earlier. The exception is consumer staples. A Wall Street Journal article from November 9 noted that shares of global packaged food and beverage companies, such as PepsiCo (PEP), could suffer if Trump did impose trade restrictions with countries such as Mexico and China. Anecdotal evidence points to worries over trade as a primary reason for the recent decline in the consumer staples industry.

Since the close on November 8, the best-performing S&P Select Sectors ETFs, through Friday’s close, have been: Financials (XLF: +10.9%), Financial Services (XLFS: +10.8%) and Industrials (XLI: +5.3%). As we explained earlier, financial firms have seen their share prices rise in recent days on expectations of higher growth and interest rates. As of Friday’s close, the CME Group’s FedWatch Tool pegged the likelihood of a December interest rate hike at 95.4%, up from 90.6% the day before. This week, in prepared testimony for a congressional hearing, Federal Reserve chair Janet Yellen said that an increase in interest rates “could well become appropriate relatively soon.”

Industrial firms have received a boost from comments Trump made during his campaign, namely his call for a $1 trillion investment in infrastructure over a 10-year period. The President-elect’s website mentions the desire to fix the nation’s airports, highways, bridges and pipelines; in his victory speech, Trump said “We are going to fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools, hospitals. We’re going to rebuild our infrastructure, which will become, by the way, second to none.”

Infrastructure-related components in the S&P industrial sector include railroads and airlines, trucking companies, heavy construction firms and building materials and fixtures manufacturers, all of which would certainly benefit from the kind of spending Trump called for.

It is important to remember that President-elect Trump has yet to send a single piece of legislation to Congress, nor has he enacted any executive orders. The market’s reaction to a Trump presidency and the policies he will pursue may be premature. As Sean Lynch, co-head of global equity strategy at Wells Fargo, said in The Wall Street Journal, “There are steps that could be painful as they [a Trump administration] try to reinvigorate the country. His policies may not have the intended impact or they may be implemented in a way that’s not as beneficial as people assume.”

Earning Season Update

This week, two more SSR holdings reported their quarterly results: Cisco Systems (Group 2: CSCO) and Foot Locker Inc. (Group 3: FL). Both companies beat their respective consensus estimate. For the current earnings season, 24 stocks in the SSR tracking portfolio have reported a positive earnings surprise, while six have reported negative earnings surprises and three have reported earnings that were in line with their consensus estimate. For these 33 companies that have already reported, the median earnings surprise is 3.4%.

Wayne A. Thorp, CFA
Senior Financial Analyst, AAII
SSR Investment Committee

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