The overall market has dramatically and quickly digested the election result this morning. Overnight, fear dominated the investing stage in the futures market with the major index futures down limit! However, the recovery began before the opening bell and continued in the equity market before lunch. It is truly remarkable how quickly an open and free securities market can determine and disseminate value of companies.
As I mentioned the macro market has recovered – a 1000 point swing in the Dow Jones Industrial Average from the overnight lows. However the market is telling us there are winners and losers with the unexpected result. It can be beneficial to take a step back to get a clearer picture of what is driving the market.
Looking at an OptionsHouse Sector ETF watchlist I created makes this obvious.
XLU Utilities and XLP Consumer Staples are down. Possible indicating that the expectation is for higher interest rates if the economic activity increases. This also is likely the reason that the XLF Financial sector is the best performer. They tend to benefit from higher rates. Dodd-Frank regulation may be less adversarial in the future as well.
Health Care and biotechs inside of this sector are exploding to the upside – the thought that Obama care will be unwound and pharma regulations may be reduced as well.
Industrials as well are strong this morning. Infrastructure spending and cyclical economic growth hopes are driving this strength. Steel is strong today within this sector possible indicating the foreign imports of low priced steel may be stopped.
Technology is underperforming Apple and Amazon both down big today. Apple may be puzzling as they have been in the headlines as possibly being able to repatriate the billions in cash they have made overseas under a Trump administration. That may be true but a larger theme today in my opinion is today is about cyclical economic growth not sector growth. What I mean here is the tech companies are typically high valuation growth stories, somewhat insulated from economic conditions. They grow because they are innovators. Today the post-election strength and recovery of the market is being driven by the expectation of higher economic activity. Meaning industrials, materials, financials and energy… Value companies which would benefit from this economic uptick. Two other ETF symbols show value (IVE) vs. growth (IVW) companies. I suggest adding those two symbols to your watchlist to add clarity to what is happening each trading day.
Value shares are up 1.6% while growth is lagging only up 33 basis pts.
Like I said it can be beneficial to take a step back to get a better view.
It will be interesting to see if these trends continue and if the promises of a new administration can deliver. The market is a very efficient mechanism to determine the correct value so you will know quickly when the outlook changes.
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