When a new president gets elected, and especially when it’s a close race that results in a change of party, the first few weeks post-election often show which sectors might excel under the new administration. Deemed by many investors the “Trump Trade” four years ago, and now the “Biden Trade”, you might think that the trajectory of these sectors would coincide closely with the presidents’ policy goals.
But they don’t. They didn’t four years ago, and they don’t today.
The Trump Trade
In 2016, as Donald Trump surprised most of the world with his win, the US stock market plummeted overnight before recovering and finishing the next day positive. This was evidence of a quick digestion of what had just happened, trades were unwound, and stock sectors started pricing in a Trump rather than Clinton administration. In addition, Republicans captured both the House and Senate, making policy changes more likely. Some sector-specific themes emerged, like a much-promised infrastructure bill, relaxed regulation and financial conditions for banks, and friendlier oil drilling regulations.
Now, keep in mind the sector swings post-election had as much to do with unwinding the Clinton Trade as it did the Trump Trade. The market was positioned for tech to lead the way, and the immediate market volatility after Trump’s election was only exacerbated by this recalibration away from the Clinton Trade.
And what happened between Trump’s election and his inauguration? Financials, industrials, materials, and energy soared.
Yet, this Trump Trade was not indefinite. Not one of those sectors were in the top four performers from then until now.
When presenting this information to my colleagues at Glassman Wealth, they immediately dove into the reasoning. “Well, oil prices plummeted; low interest rates propelled growth stocks into the stratosphere.” There will always be reasons. Trying to guess the George W. Bush trade (forever called the W Trade) in his first term (9/11) or second term (financial crisis) would have proven nearly impossible. In Trump’s case, the divided congress post-midterms had as much to do with the Trump trade fail as the pandemic.
Is the Biden Trade already irrelevant?
Much like the Clinton Trade leading up to 2016 election, the Biden Trade was leading the market as he led in the polls. A “Blue Wave” scenario needed to be accounted for and investors bid up shares in industrials and renewable energy. Here’s one of the larger alternative energy exchange-traded funds leading up to the election.
If there still is a Biden Trade, it needs to factor in a likely Republican Senate. This means that sweeping reforms in climate regulation and taxes on Big Tech are less likely to receive congressional approval.
While I believe a divided congress reduces the impact of what a Biden Trade might mean, the reemergence trade will be the one to watch. We remember life pre-COVID. We are still in this new normal for now, but the market is forward-looking.
You may not love value stocks. They were bargains before the pandemic. Then the pandemic crushed them further. As we potentially re-emerge over the coming year, these sectors provide the kind of potential for reversal.
The day the first effective vaccine was announced, Pfizer was up 7.69%. But Cheesecake Factory was up 19.09%. The biotech index (IBB) was slightly negative that day. American Airlines gained 15.18%.
The reemergence trade may trounce any expectation of a Biden Trade. I wouldn’t ignore alternative energy and the ways in which Biden can immediately reverse Trump’s executive orders on day one, but whatever he does will likely play out over a longer period.
How to position for the reemergence?
First, never go all in. And keep in mind that while Apple lost 2% after the recent vaccine announcement and large value stocks were up over 4%, no one is suggesting dumping big tech stocks for the reemergence.
I would suggest that investors consider a slight value tilt, and a small company tilt. A few ways to do this (and some of how Glassman Wealth is positioned)…
- Funds that weigh holdings differently. Since the most popular index weighs its holdings based on size, and the largest companies have performed the best, these companies wield disproportionate power over the S&P 500 index. The top 5 holdings (Apple, Microsoft, Amazon, Facebook and Google) make up over 22% of the index. To reduce the risk of over-allocating to these companies, in addition to owning the index, allocate toward either a fund that weighs based on other factors, or own companies in an equal weighting. Examples include DFA US Core Equity 1 (DFEOX) and Invesco S&P 500 Equal Weight ETF (IVZ).
- Own smaller companies. To paint a broad brush, these companies suffered more under COVID and many feared for their demise. While many smaller companies are not on stable ground just yet, much of the awful news appears to have been priced in and reemergence in the coming year could see these stocks far outperform their larger peers.
- Diversify internationally. Similar to the thought process behind investing in smaller companies, international equities have not seen the quick recovery the US stock market has seen. It’s a great time to take advantage of lower prices abroad.
- Higher yielding debt. With safe yields as close to zero as they are, investing in lower-quality debt will offer higher yields, yes at higher risk, but also with a return to some semblance of normal business activity now on the horizon. As always, diversification is prudent, but there are new themes to watch.
The graphs shown above were sourced using Koyfin.