The Xchange Blog

Trump Year 2: Where’s the next trade?

It’s been just 14 months since Donald Trump was sworn in as president. In that time the S&P 500 Index was up almost 20% from January 20, 2017, through February 15, 2018—and in that time, the economy has shown improvement, with two GDP readings over 3%. Though President Trump’s actual legislative wins have been few, the main one—tax reform—did get done. And don’t forget, the administration has been hard at work behind the scenes repealing as many regulations as possible.

Aside from the short lived drawdown in February, the market and investors seem to overall be pleased with what’s going on—at least from an economic standpoint. Let’s examine the economy and stock market performance in the sectors that the Trump administration has most affected, and try to understand if the performance will continue or reverse. Either way, Direxion can help with leveraged ETFs in both directions. We’ll review the financials, technology, defense and energy sectors, and interest rates.

Financials soar

Incredibly, the S&P 500 Financials GICS Level 1 is up over 25% since the inauguration. Interestingly, the early push in the sector was really tied to the potential repeal of Dodd-Frank and how that repeal could unleash banks’ balance sheets. But even though things didn’t play out that way, financials have roared ahead for at least three other reasons.

The first is simply the improvement in the overall economy. Financial stocks are, obviously, sensitive to how well the overall economy behaves, since they grease the wheels.

The second reason is the tax bill. Most valuations for banks have fallen in the near term, as earnings pop when tax rates come down. The institutions also buy more stock back and pay higher dividends.

And the third reason: financials very much benefit from a rise in interest rates, as they make more money on carry. This last benefit often ultimately becomes a headwind as rates go up and financing slows as well as the mortgage business.

Plus, the slow, steady rise in the market has left volatility historically low (until February). Low volatility means lower trading fees for large brokerage businesses. But for now, financials look strong and not expensive. And who knows? Maybe banks could still get relief from Dodd-Frank. Whichever way you think it goes, Direxion’s FAS (Daily Financial Bull  3X Shares ETF) and FAZ (Daily Financial Bull and Bear 3X Shares ETF) can help you chart a course to financial success.

Financila ETF
Data Range: 1/20/2017 – 2/15/2018. Source: Bloomberg. The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. 

The triple-weighted Bull FAS ETF has been up almost 70% since Trump’s inauguration.

 

Tech sector is still on fire

The S&P 500 Information Technology Sector GICS level 1 is up by a whopping 39% since last January. Post-election, pre-inauguration, there seemed to be some worry about the sector for two reasons.

The first was the issue of visas and whether President Trump would crack down on some of the highly skilled workers needed in the tech industry from other countries. It seems as though that issue was overblown, at least as it pertains to tech firms getting the talent they need.

Second, Silicon Valley was initially fairly hostile to Trump, and there was concern over some type of retribution. (Trump has called Amazon a monopoly several times.) Instead, the economy picked up, and tech companies should also benefit from lower taxes. Plus, they benefit much more than some other sectors in their ability to repatriate their cash.

So investors will likely be looking for buybacks, dividends, and eitheracquisitions. Sure, some companies are pricey, but overall, the sector (GICS) forward PE (price-to-earnings ratio) is only 18x. TECL (Daily Technology Bull 3X Shares ETF) has got you covered if you like these trends, and TECS (Daily Technology Bear 3X Shares ETF) is your instrument if you aren’t buying it.

Technology ETF
Data Range: 1/20/2017 – 2/15/2018. Source: Bloomberg. The performance data quoted represents past performance. Past performance does not guarantee future results.

 

Defense is the new offense

Aerospace and defense stocks may have benefitted the most from the new administration. The aerospace and defense (A&D) GICS Level 4 sector is up 49% since the inauguration. In addition to the tweet-induced saber rattling with North Korea, the defense budget is up massively for 2018, and it’s expected to be up again in 2019, as the Republicans have decided that defense for the commonwealth is a top priority now.

Plus, most A&D companies are squarely located in the United States, so they proportionally benefit from the tax bill again. On the negative side, the sector is a bit pricey here, coming in at almost 22x the forward PE. Take a look at the incredible performance, and be sure to look out for the DFEN (Daily Aerospace and Defense 3x Bull Shares ETF) from Direction. Note that DFEN started on May 3, 2017.

Aerospace & Defense ETF
Data Range: 1/20/2017 – 2/15/2018. Source: Bloomberg. The performance data quoted represents past performance. Past performance does not guarantee future results.

 

Black Gold

Energy has been on a wild ride since President Trump’s inauguration, having somewhat to do with the administration and somewhat not. The first six months were rough, with energy sliding almost 20% at one point in August, only to be followed by a massive, almost 30% rally before the recent pull-back. Net-net, energy is closer to flat, down 8% on the Level 1 S&P 500 GICS. A lot of the down ride came just from an oversupply globally of crude oil. The rally then came from OPEC trying to hold supply and getting Russia to do the same.

But what has the Trump administration done to help or hurt the situation? Well, it has definitely been helping producers by opening up drilling off U.S. coasts, approving the Keystone pipeline, and generally weakening regulations in the United States that help with more drilling and fracking. This is good news for producers and pipelines, but the abundance of oil in the United States (we hit over 10 million barrels per day recently—the first time since the early ‘70s) keeps a lid on prices.

The good news for traders is the resulting price volatility. It’s hard to see this administration cracking down on drilling or regulations, which should keep oil flowing. But OPEC still has an outsized grip on what happens globally with prices. Either way, Direxion can keep you in (or out of) the business of black gold with ERX (Daily Energy Bull  3X Shares ETF) or ERY (Daily Energy Bear  3X Shares ETF). Take a look at how ERY mirrored the overall market early last year.

Bear Energy ETF
Data Range: 1/20/2017 – 2/15/2018. Source: Bloomberg. The performance data quoted represents past performance. Past performance does not guarantee future results.

 

Repercussion of the tax bill: Higher rates

The ten-year Treasury rate actually fell for the first eight months of the Trump administration, even with higher inflation and better growth. It really only took off after the tax bill passed, hovering around 2.9% as dollars flooded individuals’ pockets to some degree and corporations’ pockets to a much larger degree. Many economists continue to predict higher inflation and short-term interest rate hikes throughout 2018 and 2019. But if growth slows or inflation cools off, we could see rates come back down.

Either way, Direxion has you covered again with TYO (Daily 7-10 Year Treasury Bear 3x Shares ETF) and TYD (Daily 7-10 Year Treasury Bull 3x Shares ETF).

Treasury ETFs
Data Range: 1/20/2017 – 2/15/2018. Source: Bloomberg. The performance data quoted represents past performance. Past performance does not guarantee future results.

 

Higher interest rates, in and of themselves, aren’t necessarily bad. But they do affect highly sensitive interest rate industries, like utilities and real estate, in an outsized way.

Conclusion: Year 1 for Trump was positive in the market—Year 2 is from a higher base

Now that we’re a year into this presidency, it’s obvious that markets have reacted positively to some of what it sees—at the very least. But we can’t predict how long these trends will stay in place. There are good reasons to expect more of the same, at least through the midterm elections, in terms of policy. But when will investors start to fear change and place their bets another way?

The rest of 2018 should be an interesting year. It has been so far, with the 10%+ February correction.

Direxion gives you the tools to trade in all types of market conditions,  and all types of government policy changes. As always, make sure to monitor your positions closely. 

 

Related Leveraged ETFs:

 


Performance (as of 12/31/2017)

Fund Ticker   1M % 3M % YTD % 1Y % 3Y % 5Y % S/I % Inception Expense Ratio*
(Gross / Net %)
FAS Daily Financial Bull 3X Shares  NAV 3.41 21.89 66.95 66.95 29.03 46.83 5.66 11/6/2008  1.01 / 1.02
Market 3.90 22.31 67.38 67.38 29.14 46.94 5.7
FAZ  Daily Financial Bear 3X Shares  NAV -3.85 -19.37 -46.1 -46.1 -38.65 -45.39 -59.69 11/6/2008  1.15 / 1.10 
Market -4.49 -19.82 -46.18 -46.18 -38.67 -45.44 -59.71
TECL Daily Technology Bull 3X Shares  NAV 0.62 25.12 125 125 47.77 55.97 49.32 12/17/2008  1.09 / 1.09 
Market 0.86 25.34 124.8 124.8 47.77 55.92 49.39
TECS  Daily Technology Bear 3X Shares  NAV -1.42 -22.42 -60.7 -60.7 -46.55 -48.26 -52.68 12/17/2008  1.29 / 1.10 
Market -1.71 -22.73 -60.81 -60.81 -46.54 -48.32 -52.70
DFEN Daily Aerospace & Defense Bull 3X Shares  NAV 3.75 16.94 80.36 5/3/2017  1.36 / 1.00 
Market 3.73 16.82 80.61
ERX Daily Energy Bull 3X Shares  NAV 15.16 17.01 -11.71 -11.71 -16.5 -6.24 -4.30 11/6/2008  1.10 / 1.10 
Market 15.34 17.18 -11.66 -11.66 -16.46 -6.17 -4.28
ERY  Daily Energy Bear 3X Shares  NAV -14.08 -17.16 -5.54 -5.54 -24.55 -28.08 -43.93 11/6/2008  1.15 / 1.07 
Market -14.5 -17.4 -5.61 -5.61 -24.62 -28.13 -43.95
TYD Daily 7-10 Year Treasury Bull 3X Shares  NAV 0.58 -1.11 5.54 5.54 2.57 2.17 7.01 4/16/2009  1.83 / 1.09 
Market -0.69 -1.71 5.64 5.64 2.77 2.15 6.95
TYO Daily 7-10 Year Treasury Bear 3X Shares  NAV -0.85 0.43 -9.27 -9.27 -9.42 -9.35 -14.53 4/16/2009  1.17 / 1.07 
Market -0.50 1.14 -8.94 -8.94 -9.29 -9.36 -14.45

* The Net Expense Ratio includes management fees, other operating expenses and Acquired Fund Fees and Expenses. If Acquired Fund Fees and Expenses were excluded, the Net Expense Ratio would be 0.95%. The Funds’ adviser, Rafferty Asset Management, LLC (“Rafferty”) has entered into an Operating Expense Limitation Agreement with each Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its management fee and/or reimburse each Fund for Other Expenses through September 1, 2019, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable, among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses). If these expenses were included, the expense ratio would be higher.

The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. Returns for performance under one year are cumulative, not annualized. For the most recent month-end performance please visit the funds website at direxioninvestments.com.

Investing in a Direxion Shares ETF may be more volatile than investing in broadly diversified funds. The use of leverage by a Fund increases the risk to the Fund. The Direxion Shares ETFs are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk, consequences of seeking daily leveraged investment results and intend to actively monitor and manage their investment. The Direxion Shares ETFs are not designed to track their respective underlying indices over a period of time longer than one day.