The Trump Trade
It has now been just over a month since Donald Trump surprised most with his President Elect victory and a week since OPEC confounded its doubters by agreeing to its first production cut in eight years. In this time, U.S. markets have hit new highs, and oil prices have rallied. Let’s dig a little deeper into two sectors that have exhibited strength through all of this, financials and energy. These two sectors, representing just over 20% of the S&P500 market cap, have accounted for the majority of the gains since one month ago.
Heading into the election there was no doubt that many aspects of Trump’s agenda were good for stocks and bad for bonds near term – tax cuts, deregulation, fiscal stimulus, etc. Financials were one of the few sectors that were undervalued before the election, and now, financials have accounted for approximately 64% of the gains in the market since the polls closed on Nov 8. No one knows how long this rally will last and how much further it can extend itself, but movement has been strong. The Bank of America closed on November 8th at $17, and as of December 6th, closed at $22.16. That is a total return of approximately 30%, or about 1% a day. US Banks are continuing to exhibit considerable strength across all asset classes.
Turning to energy we have seen significant movement and strength coming not only from oil prices but the energy equities as well. With the news from OPEC that they have agreed to their first production cut in eight years, the impact was immediate. Benchmark oil prices gained as much as 10% in New York and the shares of energy companies around the globe jumped. If we dig a little deeper into the commodity and look at the Crude Oil Continuous Contract we see the obvious, that considerable gains have been made. Resistance levels have held strong between $51 and $52. The next major level of resistance is at $55. Although prices have moved higher in a relatively short period, it would be positive to see CL.F push through resistance at $55 and break the extended downtrend we can see started back in 2014. If weakness is to present itself again we watch for support at $42.55 and then between $39-$40.
Toronto Stock Market
As we close out the year we look back at the big turnaround in the Toronto stock market using the TSX Composite as a proxy. We start by looking at the 11.5% drop in the calendar year 2015 led by energy and the financial services sector, two sectors that, as mentioned above recently caught fire in the U.S. Avoiding energy and the Canadian financial services sector was important in 2015 as both were net losers, especially the energy sector. While the financial services sector has rebounded in the past month since the Trump election the increase in the run up in the TSX has predominantly been commodities such as energy and mining. As mentioned with oil we find the charts interesting to see if the run is sustainable in commodities. Financials on the other hand seem will enjoy a higher rate environment which is what is widely “expected”.
First off let’s not mix up prime rates with bond yields, they are two separate animals. It is widely expected that the Bank of Canada will hold the lending rate at 0.5% and the U.S. Federal Reserve will raise rates from 0.25% to 0.5%. This rate hike along with renewed optimism about world economic growth and the perceived positive Trump effect on the U.S. economy has caused a massive sectoral shift in the past 30 days out of bonds to equity sectors such as mentioned above. This has driven the U.S. 10 year bond yields from 1.8% to 2.4%. This sector rotation has happened swift and fast as money managers re calibrate their holdings for what they believe provides the best opportunities.
We make no predictions or forecast but the money flows are telling us that we might finally be breaking out of this sideways equity pattern that has been on hold for the past two years. The U.S. market was flat in 2015 and the Canadian market was down 11%. So far in 2016 the Canadian market has yet to make up that loss but is trying mightily while the U.S. market pushes to new all-time highs up over 8% year to date, much of it coming in the past 30 days. The heavy lifting in conservative and balanced portfolios over the past two year years has been done by bonds. The 30 year bond bull market appears to have come to an end and as such one will need to adjust portfolios to match the new economic climate.
We have made changes to our equities and increased exposure into the favoured sectors and avoided the losers such as healthcare or speculative ones such as the mining sector. Both of these are but two examples of areas that have not proven worthy of an investment unless you want to speculate.
Have a great weekend and best of luck with the Christmas shopping.
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