Dow Deja Vu: 'Trump Trade' Regains Favor -- Update
By Akane Otani
The "Trump trade" is making a comeback, reflecting investors' renewed belief in the strength of the U.S. economy and fresh hopes for business-boosting policy from Washington.
U.S. stocks keep chugging higher. The S&P 500 has risen 3.6% from June 30 through Thursday's close, putting it on track for its eighth consecutive quarterly gain. The Dow Jones Industrial Average has added 4.8% in the third quarter and is up 13% year to date.
In a throwback to the early days after President Donald Trump was elected, shares of U.S. banks and industrial companies are climbing and small-capitalization stocks are in record territory, while Treasury bonds and their stock-market proxies have fallen out of favor. The U.S. dollar, beaten down for much of 2017, is rebounding.
Underlying those trades are a combination of business fundamentals, economic data and policy expectations. Corporate earnings remain strong, and some say such results support a rally regardless of policy changes. But renewed expectations that the Federal Reserve will continue to raise interest rates are making bank stocks more attractive to investors. And while there is some skepticism that the Republicans' tax overhaul will pass, the fact that a plan was put forth this week has tantalized investors with the prospect of improved earnings.
The developments could give investors fresh reason to believe stocks trading near records can keep rallying, despite concerns over pricey valuations and rising bond yields. Still, nascent signs of an inflation uptick and the outline of tax changes are no guarantee the bets will pay off.
Such wagers helped drive major U.S. stock indexes to records following the November election, but faltered early this year. Uneven economic data cast doubt on the strength of the U.S. recovery, while congressional gridlock led many investors to downgrade expectations for policy change in Washington. By the end of the president's 100th day in office, the Trump trade looked done, many investors and analysts said.
"In the last month, the market seems to have completely changed its mind about what's going to happen," said Omar Aguilar, chief investment officer for equities at Charles Schwab Investment Management. He believes sectors that tend to do well in stronger economic conditions, like industrial and financial stocks, are poised to outperform.
Those who are buying stocks now say a tax cut could prompt investors to sell bonds to buy other things.