Thursday, May 18, 2017

Results of the "Trump Trade"

Now that the Wall Street Journal and others have declared it dead, it is interesting to consider what exactly the Trump trade was.  As Josh Brown put it, the election provided finality, but the “Trump Trade” never really existed.  A decisive victory either way could have been bullish for the markets.  In our Q4 2016 investor letter, we said that the election conclusion was simply a catalyst for a much needed rotation.  The catalyst was difficult to predict, but the eventual rotation seemed likely.  So, now that it is dead, where does that leave us? 

The below chart shows the S&P 500 P/E and PEG as of 11/4/2016 (prior to the election).

Pre-Trump Rally, defensive sectors like Consumer Staples, Utilities, and Telecommunications all looked relatively expensive based on PEG ratios while some (not all) cyclical sectors appeared relatively cheaper.  The post-election performance (yellow bar below) reflected a reversion to the mean for each of these sectors with the most expensive underperforming while the least expensive outperformed.

So, where does that leave us today with the recent “death” of the Trump rally?  Relative sector valuations look more similar.  Utilities still appear moderately expensive, but Telecom has taken its place as the clear outlier (due to lower growth expectations).  Everything else is hovering around a PEG of 1.  We are back to “normal”.

The election served as the catalyst for this rotation, but it may have come regardless of the ultimate victor.  With earnings growth looking very strong for Q1, most sector valuations now appear reasonable.  The slight bias towards defensive sectors (Utilities, Staples, and especially Telecom) makes sense given the widespread caution throughout much of the last few years of this bull market.  The overall market is not cheap, but if earnings come in as expected, only a few sectors look particularly expensive.

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