The recent Presidential election in the United States marked an interesting shift from previous races. The Republican nominee, and ultimately the now President-elect, ran a relatively opaque campaign in terms of the framework and direction of his policy goals while in office.
Since winning the electoral college on November 8th, comments and appointments by President-elect Donald Trump have allowed for some theorizing on the potential changes we can expect in the governance of the United States.
The financial markets as always have been quick to reflect those changing expectations - especially as observed in some high-level sector rotations.
As outlined on a recent episode of Options Jive, equity markets have been moving in the wake of the election, but not necessarily in the same direction (or to the same degree).
The chart below helps illustrate how the Russell 2000 Index (RUT) has outperformed both the S&P 500 Index (SPX) and the Nasdaq 100 Index (NDX) in the period since the election:
Popular opinion suggests that Trump's negative rhetoric regarding the country's existing international trade deals and a generally anti-globalization stance may benefit smaller capitalized companies that are highly levered to the United States economy (i.e. companies in the RUT).
Similarly, Trump's very clearly communicated intention to dismantle the healthcare reforms put in place under President Barack Obama have also catalyzed an increase in equity values across that sector.
The same type of expectation for a diminished regulatory environment in the US financial sector has likewise raised expectations for improved profitability in banks and other companies that could benefit from potential rollbacks in Dodd-Frank legislation (a.k.a the reforms put in place after the 2008-2009 Financial Crisis).
Another chart from the aforementioned episode of Options Jive illustrates the performance of sector ETFs since November 8th and reinforces the notion that Financials and Healthcare have benefited from Trump's surprise victory:
While the value of rolling back reforms put in place specifically to help minimize the risk of future financial calamities is certainly debatable from a policy standpoint, the impact on stocks in the targeted industries cannot be minimized.
We encourage you to watch the full episode of Options Jive focused on recent "sector rotations" for the most comprehensive understanding of this material. The episode also includes a pairs trading idea that could potentially be deployed to help leverage the opportunity afforded by the market's changing currents.
The clear effect of Trump's victory and subsequent posturing regarding these industries should also have you sitting on the edge of your seat for any future announcements from the incoming administration. New rhetoric could move different sectors of the market to the same (or even greater) degree.
If you have any questions about sector rotations currently playing out in the market (or in the future) we hope you'll reach out at firstname.lastname@example.org.
Thanks for reading!
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.