This week marks one month since the surprising/shocking victory by Donald Trump. Not only did the election result surprise many political prognosticators, but more importantly for self-directed active investors, the stock market’s rally which has occurred post-election, has also shocked and surprised many market talking heads. The overall market as measured by the futures on the S&P 500 is now higher by 178 points from the depths of the election night lows of 2028.50!
E-mini S&P Futures, 1 month including overnight sessions (source: OptionsHouse)
This 9% rally has the market back at all-time highs but it tells only a small part of the story. The bigger story in my opinion has been the rotation from growth stocks into value names which has occurred since Election Day. Investors have been piling into financial and industrial companies such as Bank of America and Caterpillar at the expense of tech darlings such as Apple, Amazon.com and Facebook.
The iShares S&P 500 Value Fund (IVE) rose 6.3 percent in November, while the iShares S&P 500 Growth Fund (IVW) gained just 1.2 percent. The 5.1 percentage-point differential was the widest divergence between the two portfolios since March 2001, as the dot-com bubble collapsed.
IVE vs IVW, 1-yr chart (source: OptionsHouse)
This past month investors have fueled the rotation by feverishly buying financial companies such as Bank of America (up 32.5%), industrials like Caterpillar (up 16.22%), and energy names including Marathon Oil (up 30%). They’ve made room in their portfolios by apparently lightening their holdings in large technology names such as Apple (-.66%), Amazon (-1.0%) and Facebook (2.1%).
In our opinion, two major catalysts lay behind the move. First, Trump and a Republican-controlled Congress are expected to pass infrastructure bills, tax reforms and deregulation. That has apparently boosted sentiment toward companies that benefit from accelerating gross domestic product. It’s also reduced the appeal of secular-growth companies like FB or AMZN that expand their revenue independently of swings in the economic cycle.
Those hopes of accelerating GDP gains have simultaneously lifted bond yields, creating a potential earnings windfall for banks that benefit from borrowing at low short-term rates and lending at higher long-term rates. Traditional growth names such as FB or AMZN with high price/earnings ratios have suffered because higher interest rates typically drive investors toward stocks with lower earnings multiples.
Economic data, including durable-goods orders, jobless claims and manufacturing indexes, have supported expectations for faster economic growth as well. That, in turn, has bolstered transportation stocks such as airlines (UAL +22%, LUV +18.5) and trucking names (SWFT +15%, MRTN +22.5%) –other members of the “value” category.
Two other catalyst for this election rally have been the Organization of Petroleum Exporting Countries’ decision to cut oil production for the first time since 2008 boosting Energy and drilling names (XOP +21%, CHK +38%, COP +12%) as well as railroads (NSC +15.5%, UNP +16%).
Steel makers, another top major group, (AKS +95%, X +83%) absolutely exploded to the upside, likely benefiting again from Trump’s win. He’s certainly pontificated against Chinese competitors and their alleged dumping schemes.
The opportunity and challenge for investors going forward is to determine which of the “promises” of the campaigning candidate actually become reality in his new administration. It likely will continue to be an exciting time in the markets!
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