I remember thinking to myself the night Trump was elected that I would need to wake up early the next day so I can sell some of my fixed income and buy the market after the major drop.
To my surprise the market did not crash, and did quite the opposite - in fact it started rising. Financials and Industrials rallied about 20% in 3 months (BAC rising more than 60% and CAT rising 40%)
I was shocked - I had thought that blue chip stocks could not move so significantly after things like this as they must have been "priced in."
An analysis and disclaimer
While I realize that the following analysis is backwards looking, I do firmly believe that trying to learn from past events could be useful, so long as we realize that it is backwards looking. But again, all this is speculation and once again, backwards looking.
First things first - financials (I'll just talk about financials because it's the only one I sorta know) rallied because Trump had promised a pro-business agenda that would deregulate and lower corporate tax rates. This would help banks especially - if the Dodd-frank was really repealed then banks could pay higher dividends and buy back even more shares. Why does this matter? I'd argue that they'd instantly deserve a "blue chip 20-25" multiple. Pre-election banks were selling at 7-10 P/E ratios, thus the apparent discount.
But still, shouldn't at least some of this been priced in? This is the important part - because EVERYBODY thought Clinton would win, the fact that Trump won took everyone by surprise and by definition, it couldn't have been priced in. In fact, banks selling at such low multiples was probably because a Clinton victory was priced in. This potentially explains the huge transition into financials - what usually would have taken over months of time before the election had to be squeezed into a matter of weeks, leading to a dramatic rally in financials (and others) share prices.
How can we benefit from this findings and profit in the future?
I believe that what I should have done was twofold: 1. Before the election, have research on which sectors would do well under Clinton, and which would do well under Trump
-
Evaluate who is likely to win and by how much. Since everyone knew that Clinton was a huge favorite, I could have assumed that if Trump won (and a rare chance at that) then those Trump sectors would rally hard. I should note that I probably would still count on a Clinton victory.
-
Wake up, be totally confused that Trump won, but then buy buy buy (Cramer) Trump sectors. This sort of decision would be made possible because of the prior research in step 1.
Again, I realize it's all backwards looking and probably totally useless. Sorry there's no ;tldr
Submitted June 03, 2017 at 01:28AM by linlaoda http://ift.tt/2rP4AHC
