Investors Beware Of Trump Expectation Syndrome

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U.S. stocks rallied following the election of Donald Trump on November 8, 2016 with the Dow Jones Industrial Average gaining over 8% and the S&P 500 index advancing nearly 5% (both on a total return basis) from November 8, 2016 through December 30, 2016.

This momentum has continued during the beginning stages of 2017, with the stock market continuing to close at new highs. As of the close of business on February 27, 2017, the S&P 500 index and the Dow Jones Industrial Average have risen 6.19% and 5.92% on a total return basis respectively thus far in the New Year. Many have attributed these gains to what is more commonly being referred to as the “Trump Trade”.  At a high level, the “Trump Trade” can be broken into four primary areas of focus that will likely be part of Republican President Donald Trump’s administration, backed by a Republican controlled Senate and House of Representatives.

1. Regulations

2. Taxes

3. Trade

4. Infrastructure

Areas of the market that have attracted investor attention as a result of the “Trump Trade” include, but are not limited to, Energy Equipment & Services, Industrials, Banks, Defense, Health Care and Cybersecurity with the expectation that President Trump will be successful in each of these areas. However, it is important to remember that President Trump’s suggested priority initiatives, while they may ultimately prove to be successful, are subject to change and might either a) take longer than expected to achieve, b) not come to reality or c) not deliver upon the intended results if achieved. As a result, a potential risk to the “Trump Trade” momentum is what I am calling Trump Expectation Syndrome (“TES”). As time passes, if those same investors who piled into these areas of the market feel as though their expectations, in terms of timing and effectiveness (both are relative terms), are not being met, they may choose to reverse these positions and introduce volatility back into a market that has pretty much been devoid of market volatility for quite some time. To better understand this perspective on volatility, consider the performance of the two following volatility-oriented Exchange-traded notes (ETNs) thus far in 2017.

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Disclosure: Hennion & Walsh Asset Management currently has allocations within ...

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