Torrent of Cash Flowing to U.S. Stocks Abandons Lockstep Moves
(Bloomberg) -- Donald Trump's election has caused the biggest dispersion among U.S. equities in almost eight years. Professional stock pickers couldn't be happier.
Lockstep moves on the equities markets have been torn asunder while investors pour in cash as they dissect the potential implications from Trump policies. The Dow Jones Industrial Average and Russell 2000 Index have roared to records since his election, while technology-heavy indexes had slumped. In the S&P 500, the financial group's 10% surge through Monday outpaced the worst-performing group — utilities — by almost 17 percentage points, a degree of divergence last seen in April 2009.
For active managers who've seen their reputation battered this year amid some of the tightest trading ranges in history, the split along industry lines represents an opportunity to put to work skills some say are growing arcane in the era of passive investing. At the same time, Tuesday brought with it a reminder in the danger of rushing to judgment — financial shares slid as much as 1.7% before closing little changed, while tech stocks cut their post-election losses by nearly half.
"You're seeing money trying to chase the growth that's perceived," said Scott Colyer, chief executive officer of Advisors Asset Management in Monument, Colorado, where he oversees $18.5 billion. "This is a market where stock picking works and will reward people for buying some of the things that have been out of favor."
The S&P 500 rose 0.8%, pushing its advance since Nov. 8 to 1.9% as tech shares paced gains after lagging behind. The Dow erased an early slide, climbing 0.3% to a fourth consecutive record close. The Nasdaq 100 Index jumped 1.3%, and the Russell 2000 Index added 0.3% to an all-time high for a second day. About 8.4 billion shares traded hands on U.S. exchanges, 22% more than the three-month average.
The pre-election jitters that pushed cash levels among money managers to near records gave way to bullish euphoria as investors added more than $14 billion to the biggest ETF tracking the S&P 500 in the past week. That the stock market is suddenly making distinctions between winners and losers is a bonus to active managers who have seen money under their oversight shifted to passive ETFs and mutual funds that have outperformed for most of the year.
What's unusual about the level of dispersion within the equity market since the election is that recent instances of such disparity have come when the market's been falling. The degree now being seen last occurred during the height of the financial crisis and the bottom of the dot-com bust 16 years ago. Most recently, measures of dispersion jumped during the selloff after Brexit, as the S&P 500 plunged at the start of the year and during a correction in August 2015.
"This stands in contrast to the behavior following prior macro events over the last 18 months that were accompanied with correlations spiking in their aftermath," analysts at Strategas Research Partners wrote in a note to clients Tuesday. "Historically, declining correlations are consistent with a more supportive market backdrop."
Investors seem to agree, as they bolstered the SPDR S&P 500 ETF since Tuesday with the biggest five days of inflows since September 2015. The $14 billion surge was more than three times the net amount they had invested from the start of the year through the election.
Flows into funds tracking specific industries showed enthusiasm for financial and health-care companies. More than $2 billion was added to the SPDR ETF tracking financial companies on Thursday, the biggest single-day inflow in the product's history. A fund tracking health care set a simultaneous record with more than $1 billion added the same day.
Some of the biggest losers since Trump's win reversed direction today, as Alphabet and Microsoft added at least 1.9% to pace a tech rebound. Utilities rose after a four-day rout and energy producers rallied the most in seven weeks as crude surged nearly 6%, the most since April. The CBOE Volatility Index fell to a three-week low. An index of banks in the S&P 500 erased a selloff in the final minutes, after falling 2.2%, to close little changed.
For investors like hedge fund manager Trip Miller, the ups and downs of 2016 have provided an opportunity to win on both the short and the long side of trades.
"It hasn't been one single thing this year, it's been positions from top to bottom contributing," Miller, founder and managing partner at Gullane Capital in Memphis, said in an interview. His firm manages about $57 million. "Even though the market is up, we've also been able to buy names that were down that have been on our wish list. You have to be patient and be willing to sit on cash at a zero interest rate."
The main U.S. equity benchmark gained 3.8% last week on wagers Trump will enact a pro-business agenda, including loosening regulations and boosting infrastructure spending. The president-elect's appointment of Republican National Committee Chairman Reince Priebus as his White House chief of staff signaled a willingness to work with GOP lawmakers to pass significant legislation, though the specifics of the administration's near-term agenda remain open to speculation.
Investors are also considering what a Trump presidency might mean for Federal Reserve policy and the path for interest rates. Richmond Fed President Jeffrey Lacker said yesterday that easier fiscal policy may require higher rates, but it's too early to react to potential policy changes by the incoming administration. Chair Janet Yellen is scheduled to testify on the economic outlook before lawmakers on Thursday. Odds for an increase in borrowing costs next month have risen to 96% from 80% a week ago.