What we’re witnessing in the markets post-election has been a remarkable recalibration of market sectors.
There are 9 broad sectors that our overall economy is divided into. Most of the time, they tend to move together with the overall direction of the market.
But right now, that’s not the story. There are major divergences between the winners and losers.
The sectors that have seen the most dramatic gains are financials, industrials, healthcare, and materials.
The ones that have fallen hard include consumer staples, utilities, and technology. Both energy and consumer discretionary have been somewhere in-between, about average.
Also, worth noting is the big jump in interest rates. More on that later.
The backdrop of a Trump presidency makes these price moves understandable. Let’s take them one by one:
Industrials: Trump has promised to increase spending on the military and to use the proceeds from taxes on repatriated corporate cash (that’s brought back from overseas) to fund the rebuilding of national infrastructure.
This bodes well for both the defense & aerospace element of this sector and the more general industrial equipment and machinery elements.
In addition, the states that truly carried him to victory were the “Rust Belt” states of Pennsylvania, Michigan, and Wisconsin, which more often vote democrat.
If Trump maintains his promise to revitalize manufacturing, which is likely what brought these states over to his camp, then that will also be positive for industrials.
Health Care: From 2012 through mid-2015, Biotech was arguably the hottest sector in the market by a wide margin.
In September 2015 and August 2016, Hillary made statements about the prices of pharmaceuticals that suggested she might impose price controls onto the industry.
Ever since these statements were made, the sector has struggled – falling as much as 40% from it’s high to low. With that risk now off the table, the sector has jumped.
The Trump administration and GOP allies in Congress are also likely to repeal and replace Obamacare right away.
It’s hard to say at this point what impact that will have on the sector until more details come out.
Financials: This sector is likely to benefit for a couple of reasons. First, as mentioned earlier, interest rates have already jumped in response to the election.
Higher interest rates are typically a reflection of higher growth and inflation expectations. Higher rates also tend to have a positive impact on banks, brokerages, and insurance because it improves their profit margins.
The other important factor is the prospect of rolling back some of the regulations that were put in place by the Dodd-Frank bill, which will lower some of the costs that institutions have to spend to comply with federal regulations.
Materials: The big mover in this sector has been among base-metals. Base metals are the metals that are more common and are used for industrial purposes. If industrials are expected to be strong performers, it makes sense that base metals would also be in higher demand.
Consumer Staples: This sector has fallen hard since the election. It is typically one of the safest sectors of the economy, and the fact that it is falling suggests that investors are selling their safe investments to move into more aggressive ones.
Utilities: Like consumer staples, this sector is also a ‘safe’ sector. It’s also fallen hard post-election, which further supports the thesis that investors are moving to a “Risk On” stance.
In addition, of the 9 sectors, utilities tend to be the most negatively sensitive to rising interest rates. Because utilities pay high dividend yields, they are sometimes considered an alternative to investing in bonds.
As the yields on bonds are now rising quickly, that makes utilities less attractive from a yield standpoint as well.
Technology: This is the only one that confuses me. Technology has fallen since the election and I don’t seen any fundamental reason why expectations on the performance of technology would be diminished by a Trump administration.
One possible explanation is that investors were over-allocated to technology because so many other sectors were previously unattractive.
Now that other sectors are more attractive, investors may be reallocating part of their technology exposure to other areas. If that’s is the case, I would expect the drop in technology to be short-lived.
Overall, based on how the sectors are performing and the jump in interest rates, the market seems to be signaling that the effect of a Trump presidency could be very bullish for the stock market and that safer areas like utilities and bonds may underperform.
Photo Credit: Gage Skidmore via Flickr Creative Commons