MARKET SNAPSHOT: What's Old Is New Again: Trump Inspires Clamor Back To Stock Picking
December 10 2016 - 7:16AM
Dow Jones News
By Wallace Witkowski, MarketWatch
Stock correlations have dropped dramatically since election
In true out-with-the-old-in-with-the-new fashion, investors are
abandoning their post-financial crisis mentality of panning for
yield and cycling into big bets based on what they think a will
bring, with an eye on how the Federal Reserve may clash with those
policies.
Stocks surged to records Friday and have been on a tear since
the surprise presidential election of Donald Trump a month ago,
setting new closing records on nearly a daily basis
(http://www.marketwatch.com/story/dow-set-to-stretch-out-record-run-with-5th-day-of-gains-2016-12-09).
The Dow Jones Industrial Average posted its fifth week of
consecutive gains, rallying 3.1%, while the S&P 500 index also
gained 3.1% on the week, and the Nasdaq Composite index surged
3.6%. The Russell 2000 index closed at a record with a 5.6% gain on
the week.
With the Fed widely expected to raise rates on Tuesday
(http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html)
following their policy meeting, investors will look for how the
central bank couches their expectations for the pace of future rate
increases over the coming year, said Nicholas Colas, chief market
strategist at Convergex, in an interview.
Other than that, the current rally in stocks is appearing not to
be an anomaly as some have suggested, Colas said, but a dramatic
shift in thinking on the part of investors, many of whom were
caught off guard by the election having been committed to the
business-as-usual investing of the past eight years.
"I think the number one thing here is that you have the same
party controlling Congress and the presidency," Colas said.
"Republicans own the economy for the next two years."
One major trend supporting a broad shift in thinking has been a
sudden drop in stock correlations, the strategist noted. Up until
the election, sectors were more of less moving in lockstep with the
broader S&P 500 on macro events and central bank policy. In
other words, the higher the correlation, the more sectors and
individual stocks moved in lockstep with one another. That all
changed following the election, when investors started taking a
hard look at which sectors and individual stocks were the most
likely to benefit and be hampered by a Trump administration.
In a note, Colas pointed out that average sector correlations
dropped to 56.8% in November, their lowest level since October 2009
when Convegex started tracking the metric. That's down from 66% in
October, and 79% in September, meaning investors are becoming more
selective in their stock picks.
Read:Stock market's velocity after Trump has investors talking
Dow 20,000--and beyond
(http://www.marketwatch.com/story/velocity-of-trump-exuberance-has-stock-markets-talking-dow-20000-and-beyond-2016-12-09)
The financial sector was been the biggest winner, with the
sector rallying nearly 19% since the election. That sector has also
seen one of the biggest drops in correlation to the S&P 500
along with other large correlation drops being in the industrial
and energy sectors.
One of the reasons Colas believes this rally has legs is that
many investors are playing catch-up in these under-owned sectors,
and that takes a while to turn around. Very few portfolio managers
have been even-weight or overweight financial stocks since the
Great Recession, and weak capital investment and infrastructure
spending has had the same effect on the industrials sector.
"It's like you had a bunch of ugly ducklings that suddenly
became swans," Colas said.
To pour money into those unloved sectors, investors are selling
off overbought positions in darlings like tech and health-care, he
said, and that takes time to play out.
Going even past a so-called Santa Claus rally, stocks may climb
higher until at least Trump's inauguration on Jan. 20. That's when
Trump's first 100 days in office will have to contend with Janet
Yellen's Fed, which could create tension for investors. That will
be a time for investors to take stock of what's worked and what
hasn't and fine-tune their strategy, Colas said.
While Trump has promised policies concerning deregulation and
lower taxes, Yellen's Fed still needs to be on watch for a sudden
overheating of the economy and rising inflation.
"The Fed could be the hand brake on the economy next year,
because if there's stimulus then Fed has to worry about inflation,
and there's going to be tension," Colas said.
Read: Fed to hike interest rates next week while ignoring the
elephant in the room
(http://www.marketwatch.com/story/fed-to-hike-interest-rates-next-week-while-ignoring-the-elephant-in-the-room-2016-12-09)
Then again, with dwindling confidence in the Fed, investors may
just come to regard Yellen as a lame-duck Fed chairwoman with her
term ending in February 2018, Colas noted.
While earnings season is pretty much over, a few notable
companies are set to release results, namely, Oracle Corp.(ORCL)
and Adobe Systems Inc.(ADBE) on Thursday.
(END) Dow Jones Newswires
December 10, 2016 08:01 ET (13:01 GMT)
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