By: Kent Engelke | Capitol Securities
The Trump rally has been partially reversed. According to First Trust, the S & P 500 bank index rose 35% from November 8 through March 1. Since March 1, it is down about 9%. The S & P aerospace index advanced around 18% from election through March 1 and advanced another 4%.
The S & P 500 gained around 12.7% from the election to March 1 and is essentially flat since March 1. And then there is energy, advancing about 5% then falling about 7.5% for the same time period above.
Depending upon the index, the small cap companies are down about 10% since March.
On the other hand, the five largest technology companies in the world have rallied between 25% and 35% since January 1.
Wow! Talk about an imbalanced market.
The reason for the reversal is the belief that Trump’s pro-growth agenda has been stalled.
The greatest impetus for economic activity is job creation. According to the “The Job Openings and Labor Turnover Survey (JOLTS)” for April, the slowdown in the pace of non-farm payroll growth stems from a skills gap.
The net pace of hiring recently decelerated because of a slowdown in hiring rather than an increase in layoffs. Job opening rates match the highest on record, thus suggesting a strong mismatch in skills. A similar conclusion was made after the release of May’s labor report.
Has economic growth stalled because of Washington? Last week the Atlanta Fed upgraded their assessment of second quarter growth to 4.0% from 3.8%, the greatest growth rate since 3Q14, the quarter that Dodd Frank was fully implemented.
I will continue to argue if growth accelerates, interest rates will rise, momentum issues that thrive in a no growth environment will stall, and the smaller and value companies should advance.
This is not a radical view, but one that is steeped in historical precedence. The caveat is the massive proliferation of ETFs and technology based trading. Will there be a violent transition out of the five mega sized companies that have advanced between 25% and 35% year to date into everything else?
This is a radical thought, but did occur immediately after Trump was elected, an environment that received considerable attention.
Last night the foreign markets were mixed. London was down 0.05%, Paris was up 0.86% and Frankfurt was up 0.28%. China was up 1.23%, Japan was up 0.02% and Hang Sang was down 0.09%.
The Dow should open flat. In an escalation of Middle East violence, the Islamic state claims a rare attack on the Iranian parliament and a major shrine. According to initial reports, the attackers were Sunni extremists. At this juncture, geopolitical politics have not negatively impacted the averages. The 10-year is flat at 2.16%.
