Investor Alert
Rob Isbitts

Dec. 6, 2016, 1:49 p.m. EST

Is the Trump Trade a chump trade?

By Rob Isbitts

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You have to hand it to The Donald. His surprising U.S. election victory has energized many parts of the financial markets, while spurring vicious selloffs in other segments of the investment world. The shifts made by pension funds, mutual funds, individual investors and others occurred quickly and ferociously, which naturally makes contrarian-types like me take a step back and ask if this is just another market "sugar high."

The Trump trade has lifted spirits in many parts of the investment community, especially the mainstream Wall Street pundits who are always looking for another excuse to extend what may soon be the longest bull-market cycle in modern history. But are those who dive headfirst into the Trump Trade liable to look like chumps when the reality sets in that the anticipated surge in spending and economic investment could have some major casualties down the road? Is the stock market on its way to pricing itself for perfection, when there is no such thing in investing?

Let's examine some key market areas and assess the reward/risk tradeoffs, highlighting some of the most volatile market segments from just before the election through Black Friday (20-day trailing returns as of Nov. 25, 2016, close):

Sectors: The hot and cold

Symbol Index Name 20 Day Price Returns (Daily) Year to Date Price Returns (Daily)
^DJT Dow Jones Transportation 13.0% 19.9%
^IXM AMEX Select Sector SPIDER - Financial Index 12.9% 15.3%
^BTK NYSE Arca Biotechnology Index 11.6% -12.3%
^DJDVY Dow Jones U.S. Select Dividends Total Return Index 4.0% 19.1%
^DWRTFT Dow Jones REIT Total Return Index -2.8% 0.9%

Source:Ycharts.com, data as of 11/25/16 close

Transportation stocks like railroads, shippers and airlines are flying (pun intended) since the election on speculation that a gigantic fiscal stimulus will jump start the U.S. economy. Bank stocks have posted big gains on speculation that reduction in regulation and higher interest rates, plus that stimulus, will allow them to return to more active lending activities.

Biotechs have rallied because Hillary Clinton was assumed to be tougher on drug pricing than Trump. But not so fast, I say. While this rally can continue for a while, it is still largely speculation, and there will reach a point where these stocks, which were having a pretty good year before Trump-onomics stepped in, will be priced beyond reasonable valuations. Meanwhile, REITs took a hit from higher rates, but dividend stocks in general have performed well.

Growth stocks: The funk continues

Symbol Index Name 20 Day Price Returns (Daily) Year to Date Price Returns (Daily)
^DJUSVL Dow Jones U.S. Large Value 3.9% 9.0%
^DJUSGL Dow Jones U.S. Large Growth 0.3% 3.2%

Source:Ycharts.com, data as of 11/25/16 close

Like much of 2015, 2016 has been a rough time for growth stocks vs. their value stock brethren. The election has not changed that, as growth still lags. Consumer goods and tech companies are the main culprits, but the weak returns from growth equities is a continued overhang on the market's long-term outlook.

Major market indexes: Small caps, big rally

Symbol Index Name 20 Day Price Returns (Daily) Year to Date Price Returns (Daily)
^RUTTR Russell 2000 Total Return Index 11.5% 19.7%
^DJI Dow Jones Industrials 4.9% 9.5%
^RUI Russell 1000 3.4% 8.2%
^SPXTR S&P 500 Total Return 3.3% 10.0%
^NYA NYSE Composite Index 2.9% 6.8%
^IXIC NASDAQ Composite 2.5% 7.5%
^DJWO Dow Jones World Stock Index 0.4% 3.7%
^NDX NASDAQ-100 -0.1% 5.7%

Source:Ycharts.com, data as of 11/25/16 close

The punditry says that small caps are U.S.-based, which means Trump's U.S.-first approach to trade will favor such businesses. But this particular move seems to have been to the exclusion of everything else, as non-U.S. stocks, large caps, and the Nasdaq have bitten small caps' dust since the election. The defensive investor in me is wary of such frenzies, just as I know that caffeine consumed in the morning does not keep you buzzed all day.

Asset Allocation: Attack of the rising rates

Symbol Index Name 20 Day Price Returns (Daily) Year to Date Price Returns (Daily)
^STRA S&P Target Risk Aggressive Index 0.0% 4.1%
^STRC S&P Target Risk Growth Index -0.7% 3.5%
^STRB S&P Target Risk Moderate Index -1.4% 2.9%
^STRD S&P Target Risk Conservative Index -1.7% 2.5%

Source:Ycharts.com, data as of 11/25/16 close

I will have more to say on this in a future column, but for now, I will simply tell you that if you are a balanced investor and balance includes bonds (which it typically does), you had better start paying attention to the rumblings in the bond market. Rven if bonds find a near-term bottom soon, I suspect the larger trend has changed.

No, bond investors, this is not good for you

Symbol Index Name 20 Day Price Returns (Daily) Year to Date Price Returns (Daily)
^TYX CBOE Treasury Yield 30 Years Index 20.9% 0.3%

Source:Ycharts.com, data as of 11/25/16 close

The biggest move among the dozens of indexes I follow is this one, which is up more than 20% in 20 days. It's the yield (not price) of the 30-Year U.S. Treasury Bond, and it is one of several indicators that have introduced the real possibility that the 36-year bond bull market is ending. So while speculators are watching the stock market and its knee-jerk reactions to the Trump Administration's expected economic policies, I suggest you look beyond that to the massive debt burden that would accompany those policies. The bond market is already responding to this, but it is likely just round one of many rounds.

We all want economic prosperity, but it comes at a price. The spending part will happen, but the return on that investment cannot be evaluated for a while. So enjoy the Trump trade now, but make sure you don't end up feeling like a chump when the hype phase gives way to economic reality.

What's your risk number? My firm has made available to Marketwatch.com readers the Riskalyze risk tolerance quiz. It takes about two minutes to complete, and by doing so you can estimate your "investment comfort zone" for short-term market volatility. You can go here to take the quiz.

This material was compiled by Sungarden® Investment Research. Sungarden Investment Research provides advisory services through Dynamic Wealth Advisors. This material has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Past performance is not a guarantee or a reliable indicator of future results. Investing in the markets is subject to certain risks including market, interest rate, issuer, credit, and inflation risk; investments may be worth more or less than the original cost when redeemed. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. SungardenInvestment.com does not provide personal investment advice.

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