Published December 2, 2016
Stocks have surged after the election with investors enthused about a coming raft of tax cuts and increased government investment. The epicenter of this move has been domestic-focused stocks, particularly those of smaller companies. Companies with a more global footprint have been a mixed bag as concerns about a possibly more protectionist trade approach perhaps offsets the goodness of increased government cash infusions. To that end, our focus Nasdaq 100 index (QQQ) has substantially lagged the upward action. This lagging behavior might well portend coming troubles in the broader market as the post-election enthusiasm wears off.
Chart 1: Nasdaq’s relatively slender post-election move
For example, healthcare and biotech stocks, in particular, suffered ahead of the election when it appeared that Mrs. Clinton might prevail. Her administration was believed to have been leaning toward pushing biotech companies to rein in drug prices crimping the high profit margins of these firms. Once Mr. Trump was elected those fears were set aside and shares of biotech companies joined in the bullish party. However, the bloom has come off that rose rather quickly perhaps as Mr. Trump’s choice of leadership for healthcare came into focus.
Chart 2: Biotech stocks can’t keep a rally going
Though they too would seem to be beneficiaries of increased government investment the Nasdaq’s “infrastructure” stocks – hardware, software, semiconductors – have all fallen back. Maybe in these sectors the market is more heavily weighing the potential for tax repatriation and global trade concerns as being a net negative?
Chart 3: Tech drops back hard as post-election surge rests
Another factor in the Nasdaq’s relatively poor performance has been a rotation out of the FANG stocks – e.g. Facebook, Amazon, Netflix, Google (Alphabet). These stocks, which account for 20% of the QQQ, carried the index over the past two years. Apple, which accounts for another 10% of the index, has performed similarly with no real post-election help. Thus, this collection of stocks, representing 1/3 of the QQQ, has seen no post-election love.
Chart 4: FANG loses its bite
If indeed faster economic growth is ahead as a result of government policy changes, then the high-growth Nasdaq stocks should regain their footing and benefit. So far, the market’s knee-jerk reaction to these potential policies has been unfavorable to this group. The Nasdaq holds almost no financial, energy, or industrial stocks – the stuff that’s been receiving the bulk of investor dollars post-election. The market cannot build much more on its gains without at least some help from the Nasdaq’s list of heavyweight companies, however.
Tax cut unhappiness
One asset group that does not seem to be in favor of tax cuts – municipal bonds have plunged post-election:
Chart 5: Muni bonds lose their footing
Investors looked this week to a meeting of OPEC hoping for an agreement on production cuts to boost oil prices. Monday saw a modest -0.5% pullback in stocks after three weeks of solid gains. Caution out of Europe ahead of a weekend referendum on Italy’s government was a factor in diffusing some of the market’s enthusiasm. Stocks ran in place Tuesday with oil prices showing negative ahead of Wednesday’s OPEC meeting while U.S. GDP for the 3rd quarter was revised upward to 3.2%. November closed on a mixed note Wednesday with an OPEC agreement sending oil prices up +10% on the day while tech and biotech stocks slumped.
The broad market ticked lower by -0.3% supported by strength in energy shares, while the Nasdaq 100, devoid of energy and financial firms, slid -1.0%. A report of weak demand for Apple’s iPhone 7 sent semiconductor shares tumbling Thursday pushing the Nasdaq down another -1.4%. Yields popped higher lending support to financial shares. The monthly jobs report led trading Friday with the news cooling off interest rates as the report offered no evidence to support faster rate hikes by the Fed. Oil prices continued to build on gains coming out of the OPEC meeting. Nevertheless stocks saw continued profit-taking after the strong November advance.
Warm wishes and until next week.