Global financial, telecom and energy stocks have surged following Donald Trump's victory in the U.S. presidential election. But the party may be coming to an end for these sectors, and just getting starting for others.
Since Trump's victory, the U.S. S&P 500 Financials Index is up 17.8%, the Telecommunication Services Index is up 11.6%, and the Energy Sector index is up 6.9% (compared with the 6.4% increase in the S&P 500 index). Many investors expect these industries to do well under Trump's policies. (Before the election, we talked about how financials and the energy sector, specifically natural gas, would benefit from a Trump presidency.)
It's not surprising that these sectors of the MSCI All Countries Index have also done better than other global sectors, as the following chart indicates.
In the 11 months before the Nov. 8 election -- from the end of December 2015 through the beginning of November 2016 -- the S&P 500 index rose 6.6% (the MSCI All Countries Index was up 5.4%). Meanwhile, the S&P Financials Index had risen 5.1% and telecom services had gained 9.4% during that same 11-month period. The U.S. energy sector was already doing well in 2016 and was up 16.9% before the election.
But the investment cliche goes, "Buy the rumor and sell the fact." As Trump's inauguration (Jan. 20) draws nearer, it's soon going to be time to sell the Trump Rally.
As the surge in global financial, telecom and energy stocks steadies, other sectors that have slumped since Trump's election should start to see higher gains. Bonds, health care and alternative energy are expected to perform better, as the Trump Rally bumps up against political reality.
The Outcome When the Trump Rally Meets Reality
Enthusiastic investors could be right about the industries set to benefit from President Trump's policies. But there's one caveat: The stocks expected to do well under President Trump are already way up. This means that many expected changes are already priced into stocks before Trump even enters the White House.
Expect real-world Trump policy to begin deviating from investor expectations once Trump is inaugurated on Jan. 20.
It's anticipated that Trump's cabinet will include a large number of billionaires and Wall Street veterans. Cabinet members like this are likely to push pro-business and antiregulation policies. Oil and gas industry veterans joining the Trump team will demand greater drilling privileges, while pushing for less environmental regulation. Tax cuts, business-friendly policies and infrastructure spending should -- in theory -- help industrial companies and, in turn, boost U.S. growth.
All of these policies could be implemented and have the expected impact. But history and the bureaucratic realities of politics suggest otherwise. Only some of his policies may actually become reality. And some of his campaign promises -- a wall on the Mexican border, a 45% tariff on China imports and reversing climate agreements -- will only become policy after a long political battle. The U.S. Congress, angry Democrats, state governments, competing countries and market forces could stop many of Trump's polices. Other factors, such as rising interest rates, will also affect how the market moves.
Asian markets have suffered since the U.S. election. The MSCI Asia ex Japan Index, which tracks the performance of most major Asian markets except for Japan, is down 1.7% since Trump's victory. China's Shanghai Composite and Hong Kong's Hang Seng are flat since the election.
Asia's weak market performance, especially China's, could stem from Trump's comments on the region. (For more details on how Trump's presidency could affect Asia, download our free report on the subject here.)
Mean Reversion May Be on the Horizon
Shortly after Trump takes office, mean reversion is going to come into play. Market prices have a strong tendency to reverse extreme price movements and move back to their historic averages. This is called mean reversion, which we've previously discussed. After a period of rising prices -- as we've just seen in global financial, telecom and energy stocks -- securities tend to deliver average or poor returns. And in the same vein, market prices that decline too far, too fast, tend to rebound.
People -- investors being no exception -- aren't very good at predicting mean reversion. For example, when our favorite sports team wins the championship, we often think that the odds of another win next year are high. We tend to believe that a winning team with the same players and coach should be able to secure another victory. But back-to-back championships aren't common.
Investors often place too much value on recent stock performance when deciding which stocks to buy. We tend to see a recent rise in a stock's prices as a good investment. But this is rarely the case.
In fact, our tendency to optimistically buy into markets just before they peak and decline or panic and sell shares at the bottom has a name coined by behavioral scientists. They call it The Dumb Money Effect. Our instinct is to run with the herd. That behavior may have helped us survive in the past as cavepeople, but it is detrimental to investors' portfolio returns today.
With that behavior in mind, you should consider investing in markets and sectors left behind by the Trump Rally, rather than jumping on the bandwagon.
Promising Sectors Under Mean Reversion
Considering mean reversion may affect markets soon, the following sectors look particularly promising during the early days of Trump's presidency.
As we've previously written, bonds have been killed since the U.S. election. The iShares Barclays 20+ Year Treasury Bond ETF (TLT) - Get Report has dropped 6.0%. The Bloomberg Barclays Global Aggregate Total Return Index, which measures the global bond market, is down 4.4%. Those kinds of declines suggest the bond world is in a lot of trouble. We've seen money moving out of fixed-income and into equities since Trump's November election win. This "risk-on" behavior can continue for a bit longer. But as optimism about pro-business Trump policies dwindles, a snapback rally from recently weak global bonds is due.
2. Health Care Stocks
Trump's U.S. health care policies remain unclear. This has weighed down the country's health care industry. Health care stocks are typically not attractive in a risk-on environment because they're usually viewed as defensive, dividend-paying investments. But the long-term trend for health care looks promising as the global population ages. The iShares Global Healthcare ETF (IXJ) - Get Report has climbed 6% since the election.
3. Alternative Energy
President-elect Trump's comments such as "the concept of global warming was created by and for the Chinese in order to make U.S. manufacturing non-competitive" don't inspire confidence within the green energy sector. But even if Trump doesn't support investments within this energy sector, alternative energy will grow. China -- not America -- now leads the alternative energy investment market. Given China's pollution problem, Beijing is spending huge sums to address the country's environmental crisis. China's investments in green energy will carry on, regardless of Trump's policies.
Kim Iskyan is the founder of Truewealth Publishing, an independent investment research company based in Singapore. Click here to sign up to receive the Truewealth Asian Investment Daily in your inbox every day, for free.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.