Monday, November 14, 2016

Reaganomics 2.0: the Markets and the Trump/Republican Sweep

Monday, November 14, 2016 - So much for the popular Wisdom of Crowds and the Science of Polling.  Not since Brexit, has popular opinion supported by “scientific pollsters” been so wrong. While the surprise victory initially led to a broad equity market sell-off overnight mainly by foreigners, by end-of-day Wednesday, the market came back and ended up closing significantly higher with the S&P 500 gaining 3.8 % and the DJIA gaining 5.36% for the week with the latter hitting a new all-time high. Bond ETFs and yield proxies for bonds like High Dividend Equity ETFs, REITS, Utilities and Low Volatility Strategy ETFs took a hit as investors expect rates to rise and the yield curve to steepen. Copper prices rose to their highest level in 16 months in anticipation of new infrastructure spending. The US Dollar rose as well across the board particularly against the Mexican peso which plummeted. It is hard to call a Mexican bottom until White House policies toward Mexican trade policies become clear.

Healthcare, Industrials and Financials were strong performing sectors. We suspect that in a year or two, Wednesday, November 9th will be viewed as an inflection point in the market’s past 8 year paradigm of the Quantitative Easing combined with Fiscal Austerity to one of Reduced Government Regulation and Big Government Fiscal Spending combined with Tax Cuts --- A New Era of Reflation has returned to the markets and with that, the likelihood of inflation, increased aggregate demand and rising interest rates. This is likely to be the new global paradigm as populist movements force changes in government economic policies around the world. Indeed, by Thursday, market strategists began talking of a Trump/ Republican dominated government returning to policies pursued by the late Ronald Reagan’s Supply Side Economics. All this will not occur without periods of heightened volatility.

For investors, this means that markets will be driven more by Federal Fiscal Spending mainly in defense and infrastructure areas, reduced regulation in Financials and Healthcare rather than Federal Reserve policies. Expect less asset class and sector correlations – valuations will increasingly be determined by fundamentals. Financials will likely benefit from regulatory relief and rising interest rates.

Investors may want to peruse our Weekly ETF Equity Select List to note which multi-factor and theme indexed ETFs look particularly attractive. Glancing at the list, we find Financials such as XLFS, IXG and JHMF to have scores of approximately 60 or better. Industrial ETFs such as FIDU, AIRR, and FLM look attractive as well. Infrastructure plays such as PXR and EMIF could benefit as well. Our model continues to rate BioTech ETFs high with BBH, PPH and IBB having the highest ranks in the group although we would not ignore broader Healthcare ETFs like XLS,XLV, FHLC, FTXH and IHF.

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