Is the Trump trade alive or dead: that is the question Bank of America analyst Savita Subramanian tries to answer in a report overnight, in which she notes that it is not one Trump trade but several, and they tend to be “harder to isolate.”
She notes that while stocks continued to make new highs through February, market leadership has shifted dramatically compared to what we saw immediately following the election. In the initial month after the election, the rally was led by small caps, cyclicals, Value, low quality and beta. But since early December, those leaders have turned into laggards. An examination of the performance of the potential beneficiaries of the new administration’s policy proposals paints a similar story, with the performance of most of the initial policy winners peaking in early December and subsequently underperforming.
In short, it is not one Trump Trade, but many, and in the span of the past 5 month, they have mutated.
What have been the main changes?
As shown in the charts below, the market still believes in infrastructure reform, less so in tax reform. While stock beneficiaries of various aspects of Trump’s proposed policies mostly peaked in December, some groups have held onto their initial gains better than others. In particular, beneficiaries of domestic infrastructure spending have outperformed by 7ppt since the election, while beneficiaries of lower tax rates have outperformed the average Russell 1000 stock by 4ppt. This suggests that the market still holds onto the belief that we will ultimately see the passage of an infrastructure spending bill and corporate tax reform, despite the recent failure of health care reform in Congress.
Additionally, since the election, stocks in industries most hurt from border-adjustment taxes (retailers, autos, etc.) have underperformed the market by 6ppt, BofA finds. Whereas some of the underperformance may be attributable to weak industry fundamentals, the magnitude of underperformance suggests that the market is discounting a reasonable probability of import taxes.
Away from taxes, Subramanian notes that while it may not be surprising that Health Care Providers have rallied since last week after the failed repeal of Obamacare, the group actually began to outperform in early December. On the other hand, Biotech and Pharma stock moves suggest that the market initially viewed a Trump win / Republican sweep as a positive, but Trump’s subsequent comments on drug pricing have reversed the initial stock price jump.
Finally, when it comes to all the “other” Trump trades, BofA notes that they are “harder to isolate.”
- On repatriation likelihood, stocks with high overseas cash balances have outperformed by an average of 2ppt, but this could also be a reflection of improving Tech and global growth trends over the same period.
- On capex deductions, a disproportionate number of the companies that would benefit from immediate capex expensing rules are Energy companies whose performance has been roiled by big moves in oil prices.
- Energy companies also have a high representation within leveraged companies that would be hurt by the ending of interest deductibility. Even after excluding Energy from an analysis of leveraged companies, the bank still ends up with a group of credit-sensitive stocks whose performance is not just a reflection of policy expectations, but also represents the market’s appetite for credit.
- Capex expensing beneficiaries have underperformed by an average of 6ppt since the election (5ppt ex-Energy), while companies most likely to be hurt from ending interest deductibility have outperformed by less than a percent (both with and without Energy).