The First 100 (Trading) Days
April 03, 2017
Tomorrow, April 4, will be the 100th trading day for US stocks since Donald Trump was elected president of the US. The S&P 500 has returned 11.3% since the election, leading many to call the rally the “Trump Bump.” We think that improving economic growth and optimism about corporate profitability (not administration influence) are the main reasons for the rally. Read on, or listen to the podcast.
Several important economic data series show that the US and global economy started to reaccelerate in late summer, well before the election. The Display below shows this clearly for two: the Leading Economic Indicators and the Purchasing Managers Index—Manufacturing. Even more important, trailing 12-month earnings for the S&P 500 appears to have hit bottom in the fourth quarter of 2016, after a two-year decline.
To be sure, optimism that the administration and Congress would adopt growth-enhancing policies added momentum to the run-up. You can see that in sector returns: Stocks in the S&P 500 financial sector, which tend to benefit from economic growth and rising interest rates, have returned 19.7% since the election; stocks in the consumer staples sector, which tend to outperform in low-growth and low-interest-rate environments, have only returned 5.1%.
Is Policy Enthusiasm Warranted?
Broadly speaking, many of President Trump’s proposed policies may boost growth, including tax cuts, deregulation, and increased spending on infrastructure and defense. But other proposals, such as restrictions on trade and immigration, may slow economic growth.
Both the details and timing of new policies remain uncertain, as the stalled effort to repeal and replace the Affordable Care Act shows. And not every stimulative new policy, if enacted, will boost earnings for all sectors. For example, insurers have told us that they expect the earnings benefits of any tax cuts to be lost through competitive pricing pressures.
As a result, few analysts have added policy-driven growth to their earnings forecasts. Consensus earnings estimates for the S&P 500 reflect about 10% EPS growth in 2017 and 2018—just as they did before the November election, as the next Display shows.
Higher stock market prices without higher earnings expectations mean that valuations have expanded. Realized volatility remains low. We find the combination somewhat worrisome. In response, we’re now taking a more balanced approach to risk in our core US equity portfolio,
Before the election, our core US equity portfolio was tilted to capture the compelling opportunity we saw in value stocks—and away from yield and stability stocks, which we deemed generally overpriced. As expectations of a cycle upturn lifted many value stocks postelection, we trimmed the portfolio’s value exposure and redeployed capital into more conservative, lower-risk stocks that had lagged.
In sector terms, we reduced exposure to energy and financials and added to some defensive consumer staples holdings that had become more attractively valued, relative to the market. We also added to some technology names that are highly profitable but attractively valued versus their own history.
We expect near-term market movements to be driven by earnings and reactions to policy moves in Washington, D.C. There may be elevated volatility ahead. We think our balanced approach will help mitigate the impact for investors.
The views expressed herein do not constitute research, investment advice or trade recommendations, and do not necessarily represent the views of all AB portfolio-management teams.