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:

Financials

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. 

Biotech

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.

Interest Rates

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. 

USD and Rates

The U.S. dollar and rates promises to be a hot topic next year. The rise in U.S. currency has been unprecedented, with the dollar recently hitting 101.24, a level we last saw 14 years ago. The market continues to expect a big shift in fiscal policy with the incoming administration, which bodes well for plays on rate hikes since rates tend to rise with a strong dollar.

As mentioned above, this is a positive development for financials, but creates a head wind for emerging markets, particularly U.S. dollar-denominated EM debt countries.

For traders, potential plays are going long on USD, the U.S. 10-year Treasury, regional banks, or short on gold, utilities, REITs or Staples. 

Small Cap & Health

The post-election performance of small-cap stocks relative to large-cap stocks has been almost outstanding, with small-cap healthcare biotech stocks a particularly strong example having risen almost 10% since the election compared to 2% for large caps. Trump’s push for deregulation appears to have increased expectations of new M&A activity and growth among smaller firms, which would see their operational costs go down. Biotech stocks have continued to gain on expectations that Trump’s election means less government drug price scrutiny.

For traders, potential plays would be going long on the Russell 2000 Index and biotech. 

EEM Debt

The strengthening U.S. dollar has sent shockwaves throughout the emerging market complex, with some theorizing that Trump has burst the bond bubble, causing a sharp selloff in the sector. The iShares Emerging Market Index ETF, EEM, was down 7% after the election, with trends heading toward oversold levels, after experiencing massive inflows a few months ago.

For traders, a potential play is going short on EEM.