Trevellyan Ward, Analyst (Equities)
As we saw with Brexit, the ‘collective intelligence’ of the market was called in to question following Trump’s resounding US election win. Like the betting markets and pollsters, traders were caught with their pants down and panicked (Dow futures were down over 800 points at one stage).
However, Trump’s magnanimous and (don’t adjust your screen here) almost humble acceptance speech calmed the panic. At yesterday’s close of play the S&P 500 finished up 1% and the US dollar erased all of its losses.
Like many we are busy making sense of the post-Trump election new order, and like many we anticipate continued volatility across the bond, stock & currency markets until Trump provides some clarity on his policy agenda. Importantly, our decision to de-risk and trim portfolio exposure into the US election means we are well placed to take advantage of some notable sector trends now emerging.
At the sector level, two clear winners have been Aerospace & Defence and Construction & Materials. With recent price action for both very interesting from a technical perspective let’s take a deeper look at the outlook for each.
Aerospace & Defence
Trump was very outspoken about his ire that Nato members are failing to meet the goal of defence spending being at least 2% of GDP. Although simply voicing a long held concern of previous US heads of state, his suggestion he would withdraw US forces unless this changed certainly got the attention of the market.
As was the case yesterday, the FTSE 350 Aerospace and Defence sector is showing excellent relative strength today. Before I go on I want to remind readers that at Faraday Research we use exponentially weighted volatility adjusted returns as the basis of our bespoke sector screens.
Looking at the chart we can see that prior to the election the sector found support at 2016 Q1 highs - prices bounced off this support level three times in as many months.
Following Trumps win we have seen prices rally decisively higher from this support level; notably the sector has broken to fresh trend highs.
Yes, it could be argued that prices are now over-extended and that a period of price consolidation or retracement may ensue. However, with a powerful fundamental backdrop and the next key horizontal resistance level some distance away the sector look set to form a new uptrend going forward.
Construction and Materials
Whether investors believe Trump will actually build a wall across the US/Mexican border is yet to be seen. That aside, investors are clearly anticipating that his election will signal much increased infrastructure spending.
With this in mind we have seen US facing construction peers rocket higher, driving the index to new highs. Although the construction and materials sector has been locked in a steady uptrend since early 2013 recent price action see prices break powerfully above the 2007 high (a key price level).
Having seen prices previously find resistance at the 2007 high, this recent burst becomes even more significant. If prices hold above this level it would be a very bullish sign.
With the Trump Rally Continue?
Whilst the highlighted sector trends are holding true again today, we are not yet two sessions past the election.
There remains a huge amount of uncertainty regarding the ‘finer’ details of Trump’s policies (of course like many of his previous assertions things could simply swing full circle), hence we anticipate increased short term momentum to be the norm going forward.