They Get Away with Murder. You Book Profits…
They’re getting away with murder…
That’s how Trump described the pharmaceutical industry at his Wednesday press conference. Trashing Big Pharma has become a favorite pastime of the political class. And the president-elect showed us that he knows how to play the game.
Naturally, the entire health care sector took a hit as soon as Trump went after the drug companies. That has traders worried about additional headline risk as the inauguration draws near.
“Going forward, any time Trump is live in a press conference, or speaks about a market-related item, you’ll have this risk,” equity trader Michael Antonelli tells the Wall Street Journal. “These events may introduce a new kind of headline risk and we live in a world where these things are instantaneously translated into prices.”
Pharma stocks weren’t the only names dancing during the Trump presser. Gold jumped back to life and the dollar dropped. Then the major averages slipped—only to recover later in the afternoon.
Are we concerned about all this political nonsense?
Because not that long ago, trading conditions were much worse. Most of 2016 was downright terrible for anyone looking to beat the stock market.
By September, the difference between various asset classes’ returns hit levels not seen in almost 20 years.
Correlations went up. Volatility went down.
That didn’t bode well for stock pickers. It also didn’t create a particularly productive environment for fund managers who are expected to beat the major averages. When every single stock on the market is stuck together like glue, you don’t have much of a shot at booking outsized gains.
Thankfully, the post-election rally saved the stock pickers from another dreary quarter.
Instead of watching paint dry in a highly correlated market, investors have experienced an avalanche of shifting market themes in the weeks since the election.
First, money poured out of some of the best performing stocks of the past two years and into the forgotten corners of the market immediately after Trump won. Materials and financial stocks soared. Hedge funds had entered October holding their largest collective position in the technology sector in over ten years. They were caught off guard and underexposed to financials and industrial names, adding fuel to the buying frenzy.
Next came a furious small-cap run up. Then an oil spike helped spark an energy stock rally. Add the December rate hike into the mix and you had a recipe for even more market rotation. Real estate, utilities and other dividend payers sank. Precious metals took a hit.
Despite what the fund managers and financial media are telling you, this market is offering plenty of chances to book double-digit gains. You just have to hitch your wagon to the breakout stocks that are bubbling up under the surface of the major averages.
That’s a far cry from what investors had experienced during the stealth bear markets of the past two years…
Remember, the broad market’s chop was fueled in part by what MKM Partners chief technician Jonathan Krinsky dubbed “rolling bear markets”.
“It began with Energy and Materials in late 2014, spilled into Industrials, Financials, and Biotech, and most recently Retail,” Krinsky noted last year. “While the SPX has only suffered a 14% drawdown peak-to-trough, 20 of 24 industry groups have seen at least a 15% drawdown.”
Trump hysteria isn’t going away anytime soon. The financial media will continue to play up the “Trump bump” and overplay every single market-related comment. That’s fine. We can just tune out this noise. Thanks to collapsing correlations, the market’s giving us plenty of opportunities to book consistent gains.