In the two weeks since Election Day, I’ve been receiving plenty of questions about what I think will happen under the Trump administration. By far, the most frequently asked questions is: “What sectors will benefit the most over the next four years?” So, in today’s blog, let’s answer that question.
The short answer to this question is that Wall Street believes that financials, industrials and materials stocks are going to profit under the Trump Administration. As soon as the news broke about the election, there was a massive short covering rally that rotated money into these three sectors. In fact, based on the S&P 500 sectors, financials and industrials initially accounted for virtually most of the post-Trump rally.
Breaking it down by sector, financials are expected to benefit from a steeper yield curve, and there is some speculation that Dodd Frank legislation will be thrown out. Overall, I think the financials rally is a bit of a head fake. The fact is that Dodd Frank is not going to be eliminated by the Obama administration in December. And it’s much too soon to speculate about what’s going to happen during the Trump administration. In the meantime, the financial sector is still struggling to grow earnings.
Meanwhile, industrials and materials rallied because Trump is expected to try to rebuild the country, in a literal sense. These sectors are expected to benefit from a dramatic increase in both infrastructure and defense spending under the Trump administration.
I never recommend buying stocks based on pure speculation, especially when we have so little information about what the next administration is going to do. It’s quite possible that these sectors will do well later in 2017, but many are struggling to grow sales and earnings right now, and that’s what concerns me. In the meantime, many financial and industrial stocks are now grossly overbought and the rally is fizzling fast.
For these reasons, I still advocate a stock picking strategy, rather than indiscriminately making sector bets. In my Blue Chip Growth letter, I’ve just added two stocks—one from the financial sector, and one from the materials sector. However, I cherry-picked these stocks because they have fundamental superiors above all else.
Current Blue Chip Growth members can view these two new buys on the Buy List page here.