How Trump Made Domestic Cyclical Stocks Great Again

While the big move higher in the US stock market following the Trump victory - a move which it is safe to say virtually every so-called expert, with a few exceptions, called wrong - has been duly noted, and has since started to fizzle, the real story is what has happened below the market's surface, where the rotations from one sector to another in the past three weeks have been unlike anything seen in years.

As David Kostin observes, divergences in sector performance following the election reflect an environment with noticeably higher return dispersion. Although the S&P 500 index level has risen just 2% since Election Day, sharp rotations have taken place under the surface of the market. The disparate returns of Banks (+19%), Utilities (-6%), and High Tax stocks (+7%) are just a few examples. Whether or not the market has accurately foreseen the implications of the incoming government’s policies, the magnitude of these price movements suggests return dispersion will be higher in 2017 than it was in 2016 as President-elect Trump's new policies are implemented.

Of course, high dispersion is something hedge fund managers should be delighted about: having underperformed the market for 8 years, and facing historic redemption requests and outflows, the volatility that results from a spike in dispersion should finally allow these "smart money" managers to prove their worth... assuming, of course, they still remember how to do their job after years of bickering on twitter and posting motivational quotes by other hedge fund managers. Here's Goldman: "Years of weak relative performance and fund outflows have directed investor and media attention to the struggles of active management. We expect 2017 will witness increased return dispersion among fund managers in addition to increased dispersion among stocks."

However, as Kostin also admits, "more alpha opportunity does not guarantee better performance if fund managers fail to capture that alpha. Large and growing mutual fund outflows (more than $200 billion from equity mutual funds in 2016) as institutional and retail investors move to passive strategies will only slow if active managers move nimbly to take advantage of the rising dispersion environment."

One thing is certain: if recent moves persist, only the dumbest of the smart money will fail to generate alpha. Oh, and another thing: while it remains to be seen if Trump can "Make America Great AgainTM", one look at the charts below proves that Trump certainly made Domestic Cyclicals Great Again.

 

Some more charts showing the significant rotations under the surface by sector...

 

... and factors:

 

Some good news for value vs growth investors: the tide is finally shifting your way.

 

Finally, the current state of the market:

Source: GS