Traders Glued to These Trump Stock Trades Ahead of Address

  • Financials, retailers, building stocks among most exposed
  • S&P 500 is up for five straight weeks ahead of Trump speech

Investors Await Trump's Speech Tonight

While investors in every asset class will be hanging on President Donald Trump’s speech to Congress Tuesday, it’s those who have furiously bid up equities -- in hot-topic sectors like financials, retail and health care -- who may have the most on the line.

The oration, carrying all the policy gravitas of a State of the Union address, is expected to touch on budget goals, tax reform and trade. Considering that almost every utterance from Trump has roiled companies and industries over the past few months, swings in equities are a safe bet. Here’s what to watch:

1. Financials

Financial stocks were the big post-election winner in the S&P 500, surging 23 percent since Nov. 8, including 14 percent in November alone. Investors have been bullish on the prospect of higher interest rates and looser regulations. Trump has specifically proposed a rollback of the Dodd-Frank Act. The group slid 0.3 percent at 1:33 p.m. in New York.

  • Since finance stocks have risen in tandem with bond yields, a central concern of bank investors will be the overall credibility of Trump’s stimulus plans, from infrastructure to tax cuts. Wall Street firms have been juiced by deregulation talk so any discussion of the Dodd-Frank Act could move the group
  • “Investors want to see that the economy ranks high on the to-do list,” former CLSA analyst Mike Mayo said in a Feb. 26 e-mail. “The further up that he talks about the economy, the better it is for banks”
  • About half of the largest 26 banks would benefit from legislation allowing net interest income to be reported for tax purposes if the tax rate is 30 percent or lower, while the other half would decline, Edwin Groshans, an analyst with research firm Height Securities wrote in a Feb. 24 note
    • Says companies expected to benefit most are MTB, SYF, ZION, DFS; while FRC, KEY, HBAN are seen doing the worst
  • Fund managers are still underweight the sector and the potential exists for more gains, Bank of America Merrill Lynch head of U.S. equity strategy Savita Subramanian wrote in a report on Feb. 24. Fund managers have already consistently increased their exposure to financials over the past few months, she noted
  • Through Friday, the group’s biggest gainers since the election were AMP, BAC, RF, HBAN, ZION, CMA, LUK, CFG, GS -- all up more than 35 percent

2. Retailers

The industry has trailed the S&P 500 since the election, rising 8 percent versus an 11 percent gain for the benchmark. After climbing more than 6 percent in the month following the vote, retailers limped into year-end as speculation mounted that Trump would impose a border tax. Investors expect the measure to hurt profits for retailers that sell goods manufactured overseas.

  • Trade policies in the form of tariffs against Mexico and China are the policy base case for Barclays, although it doesn’t expect change until 2018, the firm’s chief European economist Antonio Garcia Pascual wrote in a Feb. 24 note
  • Taking border tax off the table “significantly cuts” the downside risk facing apparel and footwear companies, Bloomberg Intelligence analyst Chen Grazutis said last month
  • The border tax is a “material tail risk” for hard-line retail companies and could wipe away profits for most, Morgan Stanley analyst Simeon Gutman said in January
  • Through Friday, the sector’s biggest winners since the election were FRED, TLRD, HZO, GPI, PLCE, KMX -- all up more than 35 percent

3. Building and engineering companies

The stocks initially soared on Trump’s pledge to rebuild U.S. infrastructure, with companies like Jacobs Engineering Group Inc., Eagle Materials Inc. and Headwaters Inc. rising more than 20 percent in November alone. However, patience has worn thin over the past month, with a Bloomberg index of infrastructure stocks slipping 5 percent.

  • Trump may address how much he wants to spend on infrastructure and how it should be paid for, although he hasn’t yet given the proposed measure a strong enough endorsement, Thomas Lee, managing partner and co-founder of Fundstrat Global Advisors, wrote in a Feb. 24 note
  • Policy in tax reform, infrastructure and defense spending, trade agreements and immigration all have the potential to move industrial company valuations, Bernstein analyst Steven Winoker said in a Feb. 27 e-mail
    • Trump’s budget outline showed increase of $54 billion for defense spending and sent the 11-member S&P 500 Aerospace and Defense Index to a record high on Monday
  • The possible effect of a delayed infrastructure bill was seen on Feb. 23, when the sector dropped 1.6 percent amid a report that it may have to wait until 2018 because of a crowded congressional to-do list
  • Through Friday, the group’s biggest gainers since the election were PWR, HW, FLR, USCR, EXP -- all up at least 19 percent

4. Health-care companies

Health-care stocks in the S&P 500 climbed immediately after the election on expectations that Trump and a Republican-controlled Congress would roll back regulations. Since then, industry shares have recovered from two declines of more than 3 percent and now are at the highest since August.

  • An index of hospital companies has risen 32 percent since the election and sits at a 7-month high. The group’s strength this year stems from investor skepticism that an Affordable Care Act replacement will be a near-term risk, Goldman Sachs wrote in a Feb. 22 note
  • Pharma and biotech investors felt Trump’s influence on Feb. 7, when he called drug prices “astronomical,” sending the Nasdaq Biotech Index down as much as 0.8 percent. Since the election, the president has given conflicting signals on whether he would let the government intervene directly in drug prices to reduce health-care costs
  • Companies with the largest exposure to government spending out of stocks with $10 billion market cap or over 80 percent total exposure include WCG, MOH, HUM, CNC, DVA, REGN, GILD: Goldman Sachs

5. Companies with higher tax rates

A Goldman Sachs index of companies with the highest tax rates has beaten the S&P 500 by 2.5 percentage points since the election and in mid-January capped its biggest rally in about four years relative to the benchmark. Trump has suggested lowering the corporate tax rate to 15 percent from 35 percent.

  • Consumer and retail sector ETFs have the highest tax rates, Goldman Sachs analysts led by John Marshall wrote in a Feb. 22 report. They identified XHB, XLY, XLP, XRT as having the highest weighted average tax rates
  • The Trump administration appears further away from releasing a comprehensive tax reform plan than expected after multiple media appearances, FBR’s Edward Mills wrote in a Feb. 23 note
  • As of Jan. 30, companies in the 50-stock Goldman Sachs high-tax basket included: GT, WFM, MRO, CME, CNC, RHI, ADS, FCX, CTL, PEG

6. Companies with large overseas cash holdings

Trump campaigned on a plan to apply a much lower tax rate -- 10 percent or less, as opposed to 35 percent -- to overseas corporate earnings. The companies with the most international exposure span a range of industries, including technology, consumer discretionary, industrials and energy.

  • The potential impact of a tax holiday “should not be underestimated,” Jason Trennert, chief investment strategist at Strategas, wrote in a client note earlier this month
  • In 2004, the last time a repatriation measure passed, an index of stocks with high levels of unpardoned overseas profit quadrupled the S&P 500’s return: Strategas data
  • The 10 S&P 500 companies with the highest percentage of unremitted profits, relative to market value are XRX, MAT, WU, HPQ, FSLR, IR, MUR, WDC, GLW, HES: Bloomberg data

The wild card: Trump doesn’t reveal policy details

Some on Wall Street think the best result for stocks would be for Trump to continue skimping on details. The more that’s left up to the imagination, the easier it is for equity investors to convince themselves to continue buying, according to Andrew Sheets of Morgan Stanley.

“You’re at the part of a policy cycle where anything is possible -- no compromises have to be made and no disappointments have happened,’’ Sheets, Morgan Stanley’s chief cross-asset strategist, said in a Feb. 24 interview on Bloomberg Television. “In some ways the market might actually like a speech that’s a little more vague because it allows everybody to fill in the version of tax reform or tax cuts they have in mind. The more specific it gets about the potential offsets, like border adjustment tax, the more nervous the market could be.’’

— With assistance by Lu Wang, Felice Maranz, Janet Freund, Esha Dey, and Tatiana Darie

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