The economic forecast looks optimistic for next year, but identifying opportunities for tactical trades with exchange-traded funds will, of course, depend heavily on President-elect Donald Trump and the success of his policies, impacting everything from healthcare and interest rates to biotech and emerging markets.
Until then, moves in U.S. currency, small-cap performance, expectations of administration policies and other market shifts are presenting potential openings for bulls and bears alike as we head into the New Year. Here’s what we see:
In the financial sector, the market is pricing in a higher rate regime, putting the likelihood of an increase at 84%. Financials, specifically regional banks, benefit from a higher rate through an increase in net margins.
Trump has been vocal about his support for deregulation and lower taxes, and that’s good news for this sector. A less regulated market is a boon to financials, as lighter regulation reduces compliance and operational costs, and increases the creation of client-tailored products, such as structured products, as their restrictions ease.
The healthcare sector was heavily impacted by Democratic candidate Hillary Clinton’s focus on curtailing the biotech drug pricing structure. Biotech now looks ready to play catch-up with sector stocks spiking nearly 10% a day after Trump’s election. As part of the interest rate-insensitive healthcare sector, biotech should benefit from the current market shift away from defensive, rate-sensitive sectors.
Generally, the recent GOP win is also a win for highly regulated industries, as deregulation will relieve some of their restrictions and bode well for these stocks.
With the increased probability of a rate hike from the Fed as early as next week, we see interest rate-sensitive sectors continuing to underperform. Utilities, real estate investment trusts (REIT) and staples have underperformed the market since the second half of the year as certainty of a rate rise increased.
Trump campaigned on a major push for fiscal spending, supporting stimulus in the form of a major infrastructure infusion. A fiscal expansion theme supports a curve steepening resulting in rate rise expectation.