Trump Trades Fade Post-Election

Editor's Note: MarketMinder does NOT recommend individual securities; companies referenced herein are merely cited as examples of a broader theme we wish to highlight.

Ahead of the US Presidential election, did you see lots of articles like these: "6 Stocks to Buy When Donald Trump is President," or "16 Best Stocks to Buy Under President Hillary Clinton"? We sure did. And it continues today, with all the talk of Trumponomics bringing the Trumpflation that will boost Trump industries in a lengthy Trump Rally. While it's surely a refreshing change from the "sky is falling" mentality that persisted earlier this year, in our view, it isn't totally accurate. Recent developments show this was all just unreliable rhetoric, proving again investors shouldn't turn political talk into portfolio action.

Since it began, we've held that the Trump Rally is really just an extension of the post-Brexit rally, which was an extension of global markets' strong rebound from the correction that ended on February 11. Yet few observers look back that far, instead noting that the categories everyone believed would benefit from Trump's policies are outperforming: Financials, buoyed by hopes for deregulation; Materials, benefiting from proposed infrastructure programs; Aerospace & Defense and other segments of the Industrials sector, soaring on talk of defense spending. Yet another Trump Trade isn't working out so hot. Folks forecasted gold would rise, presuming a) gold is a hedge against calamity and b) said victory would be a calamity. Instead, it plunged. Over the summer, gold was perhaps the year's best-performing asset, at 28.7% year to date on July 6.^[i] But it has since given up most of that gain, leaving year-to-date returns at just 7%, with over half the decline coming after the election.^[ii]

Exhibit 1: Gold's Post-Election Slump

Source: World Gold Council, daily spot price per troy ounce. 12/16/2015 - 12/16/2016.

Gold, obviously, shows the danger of trading on narratives. Yet so do those supposed Trump industries, once you take a closer look. As we documented recently, they were already outperforming for much of 2016, when most thought a Hillary Clinton win was a foregone conclusion-a strong indicator Trump isn't as yuuuuge a driver as some say. A few-most notably Aerospace & Defense-did leap after the election. But that doesn't guarantee they'll be 2017's big winners. Recency bias-the tendency to extrapolate the recent past into the future-is always and everywhere an error. Plus, stocks swing on sentiment in the short term. The last five weeks tell us where expectations and sentiment are, not what Trump will actually do. How actions and policies square with expectations will influence returns over a more meaningful timeframe.

Investors have already had to adjust expectations as Mr. Trump tweets criticisms of firms in his allegedly favored industries. The S&P 500 Aerospace & Defense Index popped after Trump's victory-until December 6, when he critiqued Boeing's price for a new Air Force One.^[iii] Less than a week later, he questioned the cost of Lockheed Martin's F-35 fighter jets.^[iv] Investors flipped from cheering the prospect of a defense spending surge, to fearing cuts and meddling.

Exhibit 2: Aerospace & Defense and Trump Tweets

Sources: S&P 500 Aerospace & Defense Index: S&P Dow Jones Indices. S&P 500: Global Financial Data. Relative values indexed to 1 at 12/19/2016. Both time series are 12/19/2015 - 12/19/2016.

Or, consider Carrier, Trump's favorite corporate punching bag. If an investor traded solely on Trump's campaign rhetoric, they probably would have sold its parent company, United Technologies. But what about after the election? The Carrier bullying would still be a minus, yet United Technologies, a defense contractor, is ostensibly in a Trump Industry. Confusing! Now, after the infamous deal to keep a few hundred jobs here, does one buy, presuming the negatives are priced and cheering the tax break, or does one get hung up on recent underperformance? Trying to trade on talk and recent returns leads you to weird, contradictory places. Longer-term fundamentals are always where you should focus.

The same logic applies to the sectors most presume will suffer under Trump, like Tech. On the campaign trail, he took shots at industry heavyweights on issues like data privacy, outsourcing and taxes. Many fear limits on high-skilled immigration will slam Tech especially hard, and the sector has lagged since the election. But then came last week's high-profile make-nice with Tech execs, and now Tech is up. Maybe the thaw lasts, maybe not-but trades based on campaign-trail animosity appear out of date.

Exhibit 3: Does Trump Trump Tech ... or Tech Trump Trump?

Sources: S&P Aerospace & Defense Index: S&P Dow Jones Indices. S&P 500: Global Financial Data. Relative values indexed to 1 at 12/19/2016. Both time series are 12/19/2015 - 12/19/2016.

Trump is a politician, and pols' views change all the time. Take Health Care: Like Clinton, while campaigning, Trump initially supported letting Medicare negotiate drug prices and hinted at other cost-cutting reforms. Later, he appeared to cast aside the idea,^[v] but on December 7, he again said he'd "bring down drug prices." An investor can't assess probable outcomes from that talk. It's noisy and contradictory.

We suspect he has only just begun moderating. All presidents do, either out of desire to get re-elected, or because they run into the limits of executive power. Courts routinely block executive actions, as they did for Obama's overtime pay and immigration moves. Congress can also act as a spoiler. The Republicans have a slim majority, but 12 of those 52 GOP senators didn't endorse Trump. Some or all likely become intraparty opposition. Attempting to predict today what this or any President will prioritize and successfully push through Congress requires unheard-of foresight.

Fixation on politics ignores economics and sentiment-crucial stock drivers. Leaning on politics to pick the best-performing stock categories for 2017 and beyond, before the president-elect is even sworn in and the new Congressional session begins, is a fool's errand.