Monday, February 6, 2017 – Congratulations to the Super Bowl Champion New England Patriots and all their fans for pulling off the big comeback!
Week two of the Trump administration was marked by swings between gains and losses in the equities markets as a flurry of executive actions on immigration, trade and regulation gave rise to fresh volatility. A controversial immigration ban stoked uncertainty in early week market action, sending the Dow Jones Industrial Average to its worst day of the year on Monday. Markets appeared to be heading for a weekly decline after mixed earnings releases and decisions by the ECB, BOJ, and Fed to leave monetary policies unchanged failed to provide a catalyst to reverse early week loses. However, a better than expected January payrolls report and Trump's directives to overhaul the Dodd-Frank Act and relax banking regulations injected new optimism in the markets on Friday and helped lift U.S. equities into positive territory for the week. The S&P 500 and NASDAQ 100 each added 0.1% for the week, while the DJIA shed 0.1%, despite posting its largest advance on the year on Friday.
Financial sector and bank ETFs were among the top performers for the week, after receiving a major boost on Friday from Trump's decision to begin dismantling Dodd-Frank. Within the financial community, Dodd-Frank regulations were viewed as excessively burdensome and complex. These regulations and tighter capital requirements were viewed as particularly damaging to smaller regional and community oriented banks. Therefore, Friday's moves to simplify and ease banking regulations provided immediate support to regional bank ETFs. The iShares U.S. Regional Banks ETF (IAT), SPDR S&P Regional Banking (KRE), PowerShares KBW Regional Bank Portfolio (KBWR), and First Trust NASDAQ ABA Community Bank Index Fund (QABA) all benefited from the rally, rising 2.04%, 2.4%, 2.6% and 2.3% respectively on Friday. Broader sector funds, like the Financial Select Sector SPDR (XLF) and Fidelity MSCI Financials Index ETF (FNCL), also benefited from Friday's executive order, advancing 1.8% and 2.03%. This in conjunction with continued improvements in earnings could help the financial sector maintain its momentum in the months ahead.
Our Quant Movers list underscores the continued post-election shift from defensive assets towards cyclical stocks. Favored by investors last year amid a period of sluggish global growth and ultralow interest rates, ETFs such as PowerShares S&P 500 Low Volatility Portfolio (SPLV), Reality Shares DIVCON Dividend Defender ETF (DFND), PowerShares High Yield Equity Dividend Achievers Portfolio (PEY) have lost some of their appeal as growth expectations have strengthened since November's election. SPLV, DFND, and PEY all finished the week amongst the top 10 losers in our Quant Movers list. Conversely, the highly cyclical iShares Russell 2000 Growth ETF (IWO) finished as the top gainer on our Quant movers list for the week.
While earnings season and central bank policy decisions have wielded a disproportionate influence on market expectations and activity in recent years, it appears this influence has been moderated with the arrival of our new administration. It seems now, given the boldness and unpredictability of our new president, traditional drivers of market activity have been subordinated by political considerations. This may have important implications ahead as our increasingly volatile political atmosphere may soon translate into fresh market volatility.
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