Rate Hike Fever: "Everybody is Getting Tarred and Feathered"

Another day, another record close for the Dow.

The stock market continues to hum along as we dig into the final month of a tumultuous year.

But in a dramatic shift, investors are shunning former market leaders in favor of beaten-down bank and industrial stocks. While the Dow Jones Industrial Average added nearly 70 points yesterday, the Nasdaq Composite dropped more than 1.3%.

It’s the biggest market theme since the presidential election: Money continues to pour out of some of the best performing stocks of the past two years and into the forgotten corners of the market.

The divergences are growing as the trading week comes to a close. The Nasdaq has dropped to its lowest close since November 14. Tech stocks have been a huge drag on the Nasdaq and the S&P 500. Meanwhile, the Dow continues to climb. It’s up nearly 5% since the election, compared to a gain of a little more than 1% for the Nasdaq Composite…

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The Dow can thank the Vampire Squid for yesterday’s big gains. Goldman Sachs jumped more than 3% as investors hope that higher rates and Trump-led deregulation will breath new life into financials.

Now that an oil spike has helped sparked a renewed energy stock rally, we have two beaten-down groups shaking up the street. No one wanted to touch these stocks before the election. But thanks to Trump’s surprise victory, a massive rotation continues into December.

“Ahead of the election, hedge funds entered October holding their largest collective position in the technology sector in over a decade,” the Wall Street Journal reports. “Meanwhile, hedge funds were light on financial stocks and industrial stocks ahead of the election…”

Add a looming rate hike into the mix and you have a recipe for rotation. Real estate, utilities and other dividend payers continue to sink. The rate-sensitive groups are getting punished along with the growth stocks…

“In a higher rate environment you are going to want to pay less for growth further out. To a large extent that is probably what is happening in the higher (price-to-earnings) stocks,” Fort Pitt Capital Group’s Kim Forrest told Reuters.

“Everybody is getting tarred and feathered.”

Even the famous FANG foursome – Facebook, Amazon, Netflix, Google— remains stuck in the doghouse. All of these stocks are down at least 4.5% since the election, the Wall Street Journal notes.

So is it the end of the line for these stocks? Is Donald Trump going to steam into Mountain View, hand every Googler a hammer and hardhat and put them to work on a giant infrastructure project? Probably not.

In fact, it’s a little too early to say exactly how the market will be impacted by Trump’s policies. The real story here—as we noted just after the election— is simply that investors are nervous. They’re frantically trying to figure out how to position their portfolios for a Trump presidency. But no one’s really sure what that even means. That leads to the wild swings we’ve seen over the past month. And despite the velocity of some of these moves, it will still take time for everything to shake out.

In the coming weeks, we’ll explore ways to take advantage of the market’s post-election rotations in our short-term trades. The world is changing fast—offering us a shot at quick gains if we can grab onto the right trades…

Sincerely,

Greg Guenthner
for The Daily Reckoning

The Daily Reckoning