After overcoming the initial shock of a Trump win, which saw equity futures sink as much as 5% late on Tuesday, stocks, especially small caps, have rocketed higher. Trump rode a wave of anti-establishment and nationalistic sentiment to victory, boosted by the “basket of deplorables”, a pejorative phrase Hillary Clinton probably, in hindsight, regrets uttering.

At least in the small cap space, much of the rally has been led by what we at Opus would deem a “basket of deplorables”. Excluding financials (we will get to those later), non-earners in the Russell 2000 (R2K) were the best performers, up almost 7% in the two days after the election, versus a “paltry” 4.7% gain for the R2K. Stocks with the highest ROEs have underperformed, while those with negative ROEs are up almost 6%.

From a sector and industry perspective, Materials stocks, specifically steel producers and base metal miners, have flown, buoyed by the prospect of protectionist trade policy and massive infrastructure spending. Energy stocks have also soared on the prospect of a more favorable regulatory environment. This surge has been in spite of another surge, that being crude oil production from OPEC, which has served to sink crude prices below $45 per barrel (http://www.businessinsider.com/crude-oil-price-market-update-november-11-2016-11).

Here are a few highlights of industries that tend toward the lower quality side of the spectrum that have leapt since Trump’s win:

  • Coal +7.3%
  • Oil Well Servicers +8.1%
  • Biotech +14.2%
  • Aluminum +10.2%
  • Cement +18.9% (giant wall, anyone?)
  • Metal fabricating +11.0%
  • Steel +15.6%

However, the real story has been the Financials sector. Rates on U.S. Treasuries have responded to the prospect of massive deficit spending by spiking, with the 10-year now over 2%.

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Basket Of Deplorables
Basket Of Deplorables

Financials has been a tale of two industries: banks and REITs. The combination of higher rates and less draconian regulation has boosted small cap banks, which are up over 10% in two days! On the flip side, higher rates are crushing REITs, which have fallen over 3%. The carnage in REITs has been relatively indiscriminate, except for private prisons and some lodging REITs. The divergence between banks and REITs is captured in the following graph:

Basket Of Deplorables

Basket Of Deplorables

As with all things related to politics, hyperbole and overreaction tend to be the order of the day. Investing based on campaign rhetoric seems ill advised, especially given Trump’s unorthodox campaign and outsider positioning. Moreover, it is simply not what we do as process-oriented investors.

While the initial response of small caps has been euphoric, especially for lower quality companies, we would caution that the effects of a Trump presidency on the economy, not to mention certain sectors and industries, is unknown.While we will continue to diligently monitor the macroeconomic and regulatory environment and how they may affect our investment universe, we will not pile into a basket of deplorable stocks based on a phrase popularized by Mr. Trump’s predecessor, “hope and change”.

Article by Opus Capital Management

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