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Don’t Follow the Herd

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As tempting as it is to join the herd and buy stocks based on perceived government policy changes, savvy investors should pay more attention to company earnings.  There have been some shifts in the financial landscape post election that will increase earnings for some sectors, most strikingly the sharp rise in interest rates, yet the earnings outlook for most companies remains relatively unchanged.

The 10-year treasury yield has increased from 1.8% to 2.38% since November 9. This is a boon for banks stocks because as rates rise, banks earn a higher rate on their deposits. The prospect of a more accommodative regulatory environment is also a positive that has fueled investor optimism post election. The S&P financial sector ETF, the XLF, has increased 13% since the election. As financial stocks have surged, so have their earnings expectations. If earnings don’t measure up, the post election rally will fizzle out as well.

Industrial stocks have gotten a lift due to increased risk appetite among investors as well as the prospect of increased government spending with the new administration. The XLI (S&P industrial sector ETF) has gone up 8% since the election. It is true that an infrastructure bill boosts prospects for industrial firms, however the sharp gains in their stock prices since the election has largely factored this in. As the post election market euphoria gradually gives way to a more results driven environment, lack of follow through on government spending may create headwinds for industrials going forward.

High yielding sectors like consumer staples and utility stocks have been struggling. The surge in interest rates post election combined with fund outflows from defensive sectors has put continued pressure on these sectors. Considering the fact that most of these stocks are trading at the higher end of their historical valuations, their underperformance may well continue.

Technology stocks have underperformed since the election, mainly due to the fact that investors have sold tech stocks to buy financial and industrial stocks. Alphabet, Facebook and Amazon are three FANG stocks that were conspicuously left out of the post election rally, but have seen buying interest return so far in 2017. Despite current share price volatility in tech stocks, earnings are not likely to be affected that greatly due to government policies.

Going forward, investors have to be selective and pick stocks that are undervalued with good earnings growth, that is not dependent on government policy in order to beat the market. In essence, don’t follow the herd, follow earnings instead.

 

Disclosure:

All of the ideas expressed in this article are the opinions of Ideal Asset Management LLC

Before trading on any of the information in this article, consider consulting your financial advisor to make it suits your financial goals

All investments carry the risk of loss

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