Broadening Trump Rally Christens a New S&P 500 Champion Each Dayby
Financial, health-care and phone stocks have all led market
Citi’s Levkovich sees drop in correlation as warning sign
One of the many remarkable things about the Donald Trump bull market is the breadth of the industries it is benefiting.
Consider the week just ended, in which leadership in the S&P 500 Index changed all five days, a real-time rotation that helped send the measure and the Dow Jones Industrial Average to records. Industries as disparate as phone, financial and health-care companies took turns as the best performing group in the broader gauge, with nary a down day in the lot.
So powerful is the advance that a measure of price momentum, the relative strength index that measures the speed of gains over the last 14 days, on the Dow average just notched its highest reading since the Internet bubble. The S&P 500 capped a sixth day of gains, its longest rally since June 2014.
The situation is an about-face in a market that for the last few years has tended to pick winners and stay with them, rewarding cyclical industries one quarter, defensives the next. The sheer variety of companies gaining altitude now is the primary reason 24 months of equity paralysis is breaking and the Dow looks en route to 20,000.
“Investors are actively choosing winners and losers more aggressively than at any point since the financial crisis,” according to Convergex Group LLC chief market strategist Nick Colas. “Investors have been hustling to identify new macro trends and unlock potential winners.”
The mix of leadership might mean the “curse of correlation” is over, Colas wrote in a note sent to clients Friday. Lockstep moves between sectors averaged just 57 percent over the past month, the lowest since 2009, according to his analysis.
All this is breathing life into groups that had been all but written off. Investors pulled cash out of an exchange-traded fund tracking utility stocks for five straight months through November, and an ETF tracking real estate firms saw the biggest two-months of outflows in more than a year. Both groups just posted the best five days since September.
Energy companies that were in standstill for the better part of 2016 against a backdrop of struggling corporate earnings are up 9.5 percent since the election. Industrial firms, the next-worse group for profits this year, have posted an identical advance.
Of course, no discussion of dispersion within the equity market is complete without the implications of what it means for stock-picking. Active managers should benefit from the new environment in 2017, wrote Goldman Sachs & Co analysts led by David Kostin in a Dec. 5 note.
“We’re seeing a lot of disparity and a lot of dispersion of returns,” Erik Davidson, chief investment officer of Wells Fargo Private Bank, said in an interview on Bloomberg Television. “We may be finally moving into a stock-picker’s kind of market. There are a lot of active managers that are hoping that is the case.”
Citigroup’s Tobias Levkovich advises caution. While the bank’s chief equity strategist acknowledges the decreased correlation within the stock market, he says it’s not always positive.
The loosening among stocks suggests complacency, leaving the market vulnerable to “unexpected macro shocks,” Levkovich wrote in a note Friday.
Still, uncertainty from an aging economic cycle and policy under a Trump administration will provide opportunities for skillful managers, Goldman’s Kostin asserts.
That’s a sentiment shared at Wells Fargo, where Davidson points out that the market’s surge since the election is evidence that investors will be able to pick winners and losers in a market that changes on a daily basis.
“In this political environment, even if you know with 100 percent clarity what’s going to happen with a political outcome, you don’t necessarily know what the market reaction will be,” Davidson said.