Is the Trump Rally over or just resting?

 

In the wake of President Trump’s surprising victory in the recent election, euphoria rushed into the market and drove the major indexes to record highs.

The combination of a republican president and a republican controlled Congress led to high expectations that Trump would have an easy road to fulfilling his campaign promises.

As it turns out, this road has proven to be anything but smooth, and the market rally is taking a pause, that begs the question of whether the Trump rally is over, or are the markets just resting.

While the overall market rallied, a few sectors really took off on Trump’s pledges. The financial sector enjoyed major gains, as rising interest rates in conjunction with Trump’s promise to ease regulations on the sector drove shares higher.

Another sector to rally was defense. Among Trump’s biggest pledges, and one that resonates on both sides of the aisle, was to boost military spending. Trump wants to boost spending for each branch of the military, and as a result stocks in the sector shot higher.

Infrastructure stocks also came into favor, as investors rushed in expecting increased federal spending on general infrastructure projects, as well as a major construction project tied to the building of a wall on the Mexican border.

So is the Trump rally over? Let’s take a look at a few stocks that moved the most following the election, and how conditions appear at the current time.

Caterpillar

Heavy machinery maker Caterpillar (CAT) endured a long and painful selloff that began in mid-2014 and lasted through the end of 2015 as commodities fell. The stock began to turn things around at the start of 2016, and really took off following Trump’s election. Trump, at his heart, is a developer, and with such high ambitions for infrastructure spending and a border wall, investors rushed into CAT stock following the election. The company posted a huge earnings beat in April, but shares have been trending lower over the last week. What we are likely seeing here is stock exhaustion. CAT trades at $99.50, with analysts having an average price target of $98.83 on the stock. It is possible that analysts could start to lift their price targets in reaction to the company’s recent quarterly report, but if that does not start to happen the stock will likely remain range bound over the next couple of months until the company reports its next set of quarterly numbers in late July.

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Chart courtesy of www.stockcharts.com

Wells Fargo

Financial giant Wells Fargo (WFC) immediately shot higher following the presidential election. With Trump promising to ease industry regulations put in place during the financial crisis, and interest rates starting to rise, investors flocked to the stock and shares rapidly rose until mid-March. At this time, investors started to lock in some profits as it became obvious that President Trump was experiencing difficulty with Congress, which raised concerns that he would have a tough time with bigger ambitions such as tax reform. After a fairly steep sell one-month sell off, enthusiasm returned to the stock following the company’s earnings report in mid-April. The company posted better than expected profit, but revenues were slightly weaker than forecast. Wall Street overlooked the sales miss, and came back into the stock, which is currently trending higher. WFC trades at $55.21, and analysts have an average price target of $55.78. The stock has an attractive valuation, with a P/E of 13.7, and with earnings forecast to rise 4.8% this year, and 8.4% in 2018, the stock should build on its recent gains.

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Chart courtesy of www.stockcharts.com

Lockheed Martin

Defense contractor Lockheed Martin (LMT) made a strong move following the election, and the stock has managed to hold its gains. The company reported disappointing numbers in April, which led to a short-lived sell off, but the stock quickly made its post-earnings losses. Trump will face obstacles advancing a lot of his agenda, but increased defense spending could be an easy one. Given the current geopolitical landscape, pushing increased defense spending will resonate with both political parties, and this is why Wall Street has remained bullish on the sector, and was willing to overlook the company’s disappointing report. Expect stocks in the sector to remain strong.

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Chart courtesy of www.stockcharts.com

United Healthcare

Insurance stocks rose nicely following Trump’s victory, and insurer United Healthcare (UNH) was among the top movers. Trump made a couple promises that could benefit the sector, primarily repealing Obamacare, and lowering the corporate tax rate. Trump’s first attempt to repeal Obamacare failed to reach enough support to even come to a vote in the House of Representatives, but on the second attempt the republican party was able to craft a bill with enough support to pass a House vote. This does not end the fight, since the bill will next move to the Senate, where republicans will face an uphill battle, and any version of the bill that gets sent back to the House will look very different from the one that just passed. Repealing Obamacare is beneficial for insurance companies, since it will likely remove the Obamacare tax. If Obamacare is repealed, it will help pay for President Trump’s proposed corporate tax reform, which would provide a lot of tax relief for all corporations, including insurers. Nothing is set in stone at this point, and things can change rapidly in Washington, but for now insurers are likely to remain strong. UNH has a P/E of 22, with earnings forecast to rise 21.6% in 2017 and 9.8% in 2018, so there is still plenty of upside left in this outperformer.

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Chart courtesy of www.stockcharts.com

Apple

Tech giant Apple (AAPL) makes a lot of money, a big chunk of which it currently holds overseas. Apple reportedly has the biggest overseas cash pile of any company, with around $230 billion held overseas. President Trump wants to put in place a one-time tax holiday on cash held overseas that would allow companies to bring back cash at a rate of just 15%, versus the current 40%. He also wants to lower the corporate tax rate to just 15%. Both ideas could result in huge savings for Apple, and all the company to back a huge amount of money that it could use for acquisitions or increased share buybacks. AAPL has been trending steadily higher since the election, and will likely build on its recent gains moving forward. The company reported mixed results for its recent quarter, with iPhone sales falling short, but Wall Street remained bullish, and after a short dip in the stock following the election, shares have risen to a new all-time high. Tax relief is not the only reason investors are bullish on the company, which will launch its new iPhone 8 later this year, and is expected to be a big hit. The stock has a P/E of 18.2, with earnings expected to rise 7.7% this year, and 15.8% next year.

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Chart courtesy of www.stockcharts.com

Symbols: AAPL CAT LMT UNH WFC
Michael Fowlkes

Michael Fowlkes

Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va.

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