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It's no longer business as usual for the stock market this year

By Matthew Lui, CFA

A wise shopper saw a “going out business” sign in a fortune teller’s window and quipped, “He should have predicted that.” Given the uncertainty surrounding the unconventional leadership of Donald Trump, even a fortune teller may not have much luck predicting next year’s market. Similarly, more than a few investment managers have differing opinions on the future of the market. A financial palm reading is in order.

In the days since Trump’s victory, the stock market has responded positively to his proposed focus on economic growth driven by tax cuts and reduced regulations.

Investors have rotated into macro-themed “reflation” investments, such as industrials and commodities. The broader indices have seen a cyclical rotation into value over growth and small company stocks over large company stocks. In line with the reflation theme, interest rates have risen, consistent with the market’s outlook for improved economic growth. This has caused interest rate-sensitive financial stocks to outperform.

Technology has been the biggest loser. Money has come out of technology, a sector in which many investors were overweight, and into investments in cyclicals and financials. American technology companies rely heavily on immigrants, and there is a fear that anti-immigration policies could cause a talent drain.

Within the healthcare sector, the Republican sweep suggests less negative focus on biopharmaceuticals. However, hospitals and other service providers that have benefited under Medicaid expansion will likely be under pressure as the Affordable Care Act is reworked under the new administration.

As we head into the year under a new administration, investment managers fall into two broad camps. There are those who believe in the “Trump rally” and those who are skeptical.


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