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Sector Analysis: Should You Buy or Sell Stocks on Trump Rallies?

Sam Subramanian PhD, MBA

Donald Trump's election as President of the United States was not widely expected.

It has been key in driving recent stock market performance as President Trump's influence on stocks has proven to be as least as strong as the one wielded by the Federal Reserve during the Obama administration.

As of April 30, the S&P is up 12.4% since the November 8, 2016, election.

The gains are roughly evenly split before and after inauguration day.

From election day through inauguration day, the S&P 500 rose 6.6%.

Since inauguration, the benchmark is up 5.5% in Trump's first 100 days of Presidency.

The similarities of the rally end here pretty much.

Pre-inauguration Rally

In the lead up to the inauguration, investors were optimistic on economic growth ticking up on the implementation of Trump's pro-business policies.

Trump promised to reduce taxes, ease regulations, and increase spending on infrastructure.

Trump sought to curb the issuance of H1-B visas and re-negotiate fairer trade deals to promote job creation.

He also pledged to end Obamacare and eliminate Obama-era climate change regulations.

Sector Analysis: Returns from Election to Inauguration

Prior to the inauguration, Trump's promises to reduce taxes, ease regulations, and increase spending on infrastructure drove sector returns.

The 'Trump trade' saw stocks of financial, telecom services, industrials, materials, energy, and consumer discretionary companies gain 10.5% on average from election day to inauguration day to outperform the S&P 500 by 3.9%.

Shares of information technology, healthcare, consumer staples, and utility companies did not fare as well. They lagged the S&P 500 advancing just 2.0% on average.

First 100 days after inauguration

So, how have 'Trump trade' rally followers fared after the first 100 days of Trump's Presidency?

The short answer: Not good.

Sector Analysis: Returns during First 100 Days after Inauguration

After the inauguration, Trump trades have lost momentum as investors question the President's ability to come through with other election promises.

The fortunes of sectors that led the Trump rally have largely reversed. With the exception of consumer discretionary, all of these sectors have underperformed during the first 100 days.

Shares of financial, telecom services, industrials, materials, energy, and consumer discretionary companies have gained just 1.2% on average to lag the S&P 500 by 4.3%.

On the flip side, the Trump trade laggards have become leaders.

Shares of information technology, healthcare, consumer staples, and utility companies have advanced 8.0% on average to beat the S&P 500 by 2.5%.

In hindsight, investors who sold the Trump rally leaders on the inauguration and invested the proceeds in Trump rally laggards have come out ahead in the first 100 days.

Why 'Trump trades' lost momentum post-inauguration

President Trump has not been able to swiftly repeal Obamacare. After months of negotiation, the House of Representatives passed a health care bill on May 4 to repeal major portions of Obamacare with a narrow 217 to 213 margin. Now, Senate leaders are expected to push back on this bill.

Investors are now questioning Trump's ability to come through with other election promises.

In the absence of concrete results from the Trump administration, investors have recently shifted their focus to economic data and first-quarter corporate profits.

Trump, however, is not to be blamed for everything impacting the Trump trade after the inauguration.

Financial stocks lost their mojo after bond yields dropped on tepid inflation and soft consumer spending trends.

Energy stocks have declined as an abundance of U. S. shale oil has offset OPEC's production cuts and pressured oil prices.

What does this mean for your investments?

Despite gyrations at a sector level since the election, the S&P 500 has held its bearing and risen to record highs.

The rally in stock prices has largely been driven by expectations of a steep cut in corporate tax rates.

Trump has proposed to cut the corporate tax rate to 15% from 35%. The proposal, however, lacks specifics for offsetting the lower tax rate with new revenue. Republican hawks are likely to reject the plan if it could add billions of dollars to the federal deficit.

So far, investors have been patient in giving the Trump administration time to get its act together and deliver on its promises. Investors are likely to run out of patience at some point and wonder if anything of substance will ever happen.

The ability of stock prices to remain stable and rise over time is likely to be undermined in such a scenario. Time will tell if the S&P 500 is now in the midst of a peaking process. It the Trump trade serves as a guide for what may follow, investors would be prudent to take some chips off the table.

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Related Articles:
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AlphaProfit MoneyMatters is a free e-letter distributed to registered users of AlphaProfit's website. The e-letter analyzes the economy, markets, and sectors and provides money-making insights on stocks, exchange-traded funds, and mutual funds. AlphaProfit MoneyMatters is edited by Dr. Sam Subramanian acclaimed for his financial acumen and analytical skills.

AlphaProfit Investments, LLC is an independent investment research firm based in Sugar Land, TX. AlphaProfit publishes the AlphaProfit Sector Investor's Newsletter, edited by Dr. Sam Subramanian. Leveraging sector funds, the Newsletter provides high-performance model portfolios with Fidelity funds and exchange-traded funds. It also includes actionable stock recommendations. This newsletter features among MarketWatch's top 10 investment newsletters and has won the coveted #1 rank from Hulbert Financial several times.

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