There are many similarities between the incumbent U.S. President Donald Trump and former president Ronald Reagan. Both are Republicans and won over democratic presidency. Both started executing sweeping reforms including tax cuts and economic deregulation.
For example, Trump proposed a substantial increase in the Pentagon defense budget to ramp up the fight against ISIS and build more jets, ships and military technology. This represents the largest increase in national defense spending since President Ronald Reagan’s time in the 1980s. Trump also supposedly enacted the biggest overhaul of tax code since Ronald Reagan.
Both sent the stock market rallying after taking chair. The percentage gain was about 10% during Reagan’s the first six months in office or his honeymoon period as per the director of technical research at Altaira Capital Partners, as quoted on CNBC. This is because, the market could not hold on to those gains and the Dow Jones was down 9% that year.
For Trump too, global stocks roared when he was elected in November 2016. SPDR Dow Jones Industrial Average ETF (DIA - Free Report) gained about 27.5% in 2017 and 19.6% in the last one year but is down about 2% this year (as of Apr 23, 2018).
Why Does Such Selloff Come?
As per the director of technical research at Altaira Capital Partners, “most presidents, after their honeymoon, something happens because all of the things that they're planning to do politically takes time to execute.” Maybe overvaluation concerns and the full pricing of all good news or all promised policies in equities too soon lead to a crash later.
Not All Same Between Trump and Reagan
The Trump rally appears far sturdier. Markets sprinted for 15 straight months from the November 2016 low to the high of January 2018 (barring some occasional dips). During this frame, the Dow was up 45% and the S&P 500 jumped 34%.
The main dissimilarity is that Reagan took the charge of the United States in a recessionary state and Trump became President when the economy was steady. Reagan’s era was stricken with stagflation issues and Trump era with deflationary threats where 2% PCE inflation is hard to come by.
When Reagan got elected, the 10-year Treasury rate was about 12.7%. And when Trump was elected in early November 2016, the benchmark 10-year treasury yield was about 1.86% and now it is just 2 bps away from 3%.
How to Play the Trump Rally in May?
Average annualized stock return was 15.08% in the Reagan era while Trump administration offered about 15.38% annualized returns till October 2017.
It is most likely we’ll not face any 1987-like market crash, rising yields are a concern as it is likely to trigger both equity and bond selloffs. Yield on benchmark U.S Treasuries are hovering around the highest level since January 2014, while the two-year yield touched its highest level since September 2008.
Investors are worried about the recent pickup in inflation without an equally fast growth in the economy. First-quarter economic activity grew 2%, as per CNBC's Rapid Update. Also, we are about to enter into the defamed month of May. Many investors started fearing the old adage “Sell in May and Go Away.”
So, we suggest not to sell but be safe with these ETF holdings.
iShares Edge MSCI Multifactor Energy ETF (ERGF - Free Report)
Energy is hot now, so this energy-oriented value ETF that has a favorable exposure to target style factors can be a good pick (read: Energy ETFs Rally: Will the Gains Last?).
iShares Evolved U.S. Healthcare Staples ETF (IEHS - Free Report)
The fund deploys data science techniques to pick companies with exposure to the healthcare staples sector. In any case, it is a non-cyclical sector and safeguards from a recession.
PowerShares S&P 500 Pure Value Portfolio (RPV - Free Report)
The fund measures the performance of securities that exhibit strong value characteristics in the S&P 500 Index.
First Trust STOXX European Select Dividend Index Fund (FDD - Free Report)
Thanks to economic growth and easy money, Europe is in a fine fettle. The fund consists of 31 high dividend-yielding securities selected from the STOXX Europe 600 Index. It yields 2.86% annually (read: 5 Europe ETFs With Great ESG Scores).
AGFiQ US Market Neutral Momentum Fund (MOM - Free Report)
The fund provides exposure to the “momentum” factor by investing long in U.S. equities that have had above-average total returns and shorting those that have had below-average total returns (read: 5 Long/Short ETFs to Play in Market Crash).
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