Monday's close officially marked 70 trading days since the US election and while plenty has changed, for both country and market, it's really been a "Tale of Two Halves."
The 35 trading days after the US election saw the ascension of the "Trump Trade." In this risk-on environment, the more economically sensitive sectors, including financial, energy, industrial and material stocks, all rallied more than the broader stock market, while defensive sectors (mainly consumer staples, utilities and Health-care stocks) lagged the S&P 500 (see Sector Rotation And The Santa Rally for more):
Source: Stockcharts.com
From a fundamental perspective, this shift was driven by investors' expectation that the new Republican-controlled government would enact pro-growth fiscal policies (such as infrastructure spending and tax cuts) while also cutting onerous regulations. While Trump and Company had certainly mentioned these topics, the president elect seemed far more focused on prioritizing controversial immigration and trade policies. Market participants nonetheless donned their rose-colored glasses and assumed the best.
Role Reversal
That all changed around the turn of the year. As it became increasingly clear that the new administration would spend much of its political capital during the "honeymoon period" on non-economic goals, the "Trump Trade" started to unwind. In the last 35 trading days, previous cyclical leaders like energy and materials have struggled, while more defensive sectors like health-care stocks have been pacing the market.
Source: Stockcharts.com
What's It Mean?
The "Tale of Two Halves" lays out a clear strategy for stock-market investors over the next couple of quarters. The more the new administration focuses its efforts and political capital on non-economic goals like trade and immigration policy, which arguably hurt economic growth, the better defensive sectors like health care, utilities and staples will do.
Conversely, a pivot to focusing on economic issues like tax reform and infrastructure spending from Trump and the Republicans in Congress should provide a boost for the pro-growth energy, materials, industrial and technology sectors.
Like it or not, we've entered a new regime where markets are more focused on governmental actions than central banks. As such, traders should pay close attention to comments from the likes of Donald Trump, Paul Ryan, Angela Merkel and Shinzo Abe -- perhaps more so than on the musings of Janet Yellen, Mario Draghi and Haruhiko Kuroda.