Stock Market Update January 21, 2017: A Look at the Trump Effect

Now that Trump has officially taken office, it is a good time to take a look at the stock market. We need to take a look at where things stand currently, and how we can position ourselves for the new administration. So, let's first take a look at the major ETFs that track the Dow Jones Industrial Average (DIA), the S&P 500 (SPY), and the Nasdaq 100 (QQQ).

The Dow Jones had a large jump after the election. However, the Trump trade has since fizzled out. This index has done the best since the election because it has so much influence from banks. This index is a price weighted index, so the higher price stocks have more influence. The largest stock is Goldman Sachs, which jumped $60 or 33% in a month following the election.

From this move, a new trend has emerged. The large move upwards broke through the resistance from 2014 - 2016. However, the quick move up is a little concerning. A lot of money entered the market, very quickly. It was a quick repricing based on the hopes of what Trump will do to the economy. Well, this has left us with a flag formation. The flag is usually a continuation pattern, but it could be a reversal pattern.

Now we could be hopeful that a continuation is coming, and in that case we could expect another $15-20 move upwards. However, the fundamentals are not there to support it. We are seeing this formation because the market is waiting to see what exactly Trump is going to do, and when he is going to do it.

The S&P 500 enjoyed some great gains from the Trump election as well, however the weightings are different from the Dow Jones, which is why it did not have as great as a move. This index has also shown to be in a new trend from the resistance breakout, and has the same flag formation the DIA has, Again, this formation is waiting to see what the new president can and will do to our economy.

The Nasdaq 100, is a heavily weighted in the technology sector. The lack of financial support in the index caused a much slower move upwards, and a much less drastic one. However, this index looks to be in a much better trend. The resistance turned support shows strength, and there is not flag/pennant formation. This index is not waiting for Trump because he has not talked about any major changes he believes the sector needs. One of the few things he has talked about is the repatriation of offshore cash. This could actually benefit the stocks with large offshore holdings, as the money could be used for dividends, share buy backs, or both.

The following charts from each individual sector. We will use these to analyze the components of the indices, and try to gauge the strengths and weaknesses in the market.

Basic materials:

The major trend of this sector is sideways, but the minor trend is currently up, and if it can break to new highs the sector will change from sideways, to an uptrend.

Energy:

A fresh uptrend has has begun, about a year ago.

Financial:

This sector enjoyed the election of Trump the most. It had a 15% jump, following the election.

Industrial:

This sector jumped 10% following the election. It has broken out, and looks like it may have started a new trend.

Technology:

This sector looks a lot like QQQ. It has begun a new trend upwards, and has ignored most of the Trump noise,

Consumer Staples:

This sector has been in a long term uptrend, and may be reversing the minor down trend it was in.

The newest sector, Real Estate:

This sector experienced a quick bump, then a just as quick drop from the election.

Utilities:

This sector had a minor downtrend, but has since reversed. Currently in a flag, and moving sideways.

Healthcare:

This sector has not made new highs since 2015, and may be worried about Trump.

Consumer Discretionary:

A new trend may be forming above the resistance, which is a good thing for the economy.

So, what are the economic expectations of Trump? 

Let's take a look at his campaign promises. He wants to lower taxes for individuals and corporations, bring back offshore cash, repeal the Affordable Care Act (Obamacare), bring back manufacturing jobs, and rebuild infrastructure. According to him, this this could provide 4% growth a year in GDP.What will these do the stock market?

First, the consumer should be getting a bump in the amount of cash they have. The can keep more cash from taxes, more people should have jobs, and he promises to make healthcare more affordable. This should benefit the consumer discretionary and consumer staples sectors. Lower taxes should help all stocks, as corporations will be able to keep more cash on their balance sheet. The repatriation of offshore cash should benefit stocks as well, as the money can then be used for R&D, stock buybacks, and dividend payments.

The only sector that really needs to watch out is the healthcare sector. A lot of money has been put into the sector from Obamacare, and its removal could also remove that inflow of cash. However, his tweets have already caused damage to individual companies, which is now a risk, especially in stock picking.

Overall, these promises that Trump has made should be good for stocks. At the same time he has made other promises/statements that should worry investors, such as a trade war, and his protectionist agenda. A trade war could seriously damage not just the US economy, but the world economy as well.

So how should you invest? 

Stock picking is a risk. At any point Trump could send a tweet that could severely alter a companies stock, or an entire sector. We have seen this in his attacks on Boeing (BA), Lockheed Martin (LMT), and the pharmaceutical industry as a whole. Sticking to mutual funds, or ETFs could lower this risk, however.

Now may not be a good time to buy. The market has mostly moved on hopes, which is not a great reason for these high valuations. They have also risen on the the good policies, while ignoring the problems those same policies can cause. It will take time to see if Trump can keep his promises, and you do not want to be on the wrong end of a "buy the rumor, sell the fact" trade. It may be best to stick to low risk sectors that Trump has not yet had a problem with, like technology. Be patient, and wait for policies to come to fruition. Otherwise, you are only making a bet, and that is not smart investing.

Look out for my next post:
I will be writing a future piece on the economy, and the effects of Trump's policies soon. The idea is for an in depth look of his policies, and how they will effect you.