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What Comes After the Trump Rally?

The market has ripped 5% higher in just the few weeks after Trump’s nomination.

But the rally isn’t coming from the largest companies that are weighted more heavily in the S&P 500. In fact, these companies aren’t performing well at all.

Here are the performances of 10 of the top companies in the S&P 500 that make up nearly 20% of the entire index:


Apple (AAPL):  Down (3% weighting in the S&P 500).

Microsoft (MSFT):  Flat (2.5% weighting in the S&P 500).

Exxon (XOM): Up 5% (2% weighting in the S&P 500).

Johnson & Johnson (JNJ): Down (1.6% weighting in the S&P 500).

Berkshire Hathaway (BRK.B): Up 10% (1.6% weighting in the S&P 500).

JP Morgan (JPM): Up 20% (1.6% weighting in the S&P 500).

Amazon (AMZN): Down (1.6% weighting in the S&P 500).

General Electric (GE):  Up 5% (1.5% weighting in the S&P 500).

Facebook (FB): Down (1.4% weighting in the S&P 500).

Wells Fargo (WFC): Up 20% (1.3% weighting in the S&P 500).


Astute readers will notice that only banks and “companies that make things” are the ones that are doing well.

The common denominator is the cost of capital.

Interest rates are going up: which just hands money to banks.

Banks play an arbitrage game – where they play their massive portfolios of long-dated, super-low interest rate bonds against the new short-term, higher interest rate bonds.

Meanwhile, oil prices moving up reward the usual energy sector players.

Higher oil prices spark inflation.

Traditionally inflation kicks off economic activity because it sparks inventory building. (The idea here is if I know prices will be going up a few months from now, I better buy today, in advance of higher prices tomorrow.)

Inflation reinforces the need for higher interest rates because that’s the Federal Reserve’s mantra.

So that’s the framework for the rally. On the one hand, banks get handed a big check courtesy of higher interest rates. On the other, industrial activity will perk up.

The After Party Hangover

The rally has become a bit self-fulfilling.

November kicks off a period when institutional investors re-position their portfolios.  It was delayed a week by the election. And then the rally sparked a bidding war as folks had to violently close the wrong positions and open new ones.

This means the market has priced in the impact of the three boosters (inflation, interest rates, portfolio re-positioning).

What comes next?

The U.S. economy has turned the corner. Companies aren’t profitable yet. But with a little organic growth in sales, they will be profitable again in 2017.


But the only reason they are profitable is because of cost discipline.

That means no hiring: Non-farm Private Payrolls averaged 240K per month in 2014, 220K in 2015 and only 160K in 2016.

Other forms of cost containment will be taken as well.

For example, a recent poll was conducted by the large employment services company Challenger Gray ( )

100 companies were surveyed and asked about planned holiday party spending. The survey sounded really positive: 80 companies will be throwing holiday parties, of whom 20% will budget more than last year.

But hold on…

The survey really says that 84 out of 100 companies are keeping spending flat to last year. Or not even throwing a party.

And compared to last year, 4 companies cancelled their holiday parties.

So that’s:

  • 16 companies expanding budgets
  • 4 companies cancelling holiday parties
  • 80 companies didn’t change

My takeaway is that most companies (84%) remain firmly in cost-control mode.  Some at extreme levels.

And that’s before the cost of doing business began to race up in November (inflation, higher interest rates and a stronger dollar – all profit killers for companies).

And as far as the potential upside is concerned, here’s what the CEO of ADI recently said:

“We hear like everybody else hears the rhetoric. We have yet got to see what the policy is going to look like, but maybe on the margins it will be good, at least for the American business environment.”

KEY TAKEAWAY: The Trump rally happened too quickly. His policies will take months to before the effects get filtered into the economy. Call me worried. But I don’t see breadth in the stock market rally.

Companies are in cost-control mode now through the end

Worse, I see even bigger problems ahead for the economy in the form of a consumer getting squeezed.

And, lastly, a strong dollar and higher interest rates are never good for the stock market.

Don’t get tripped up by the pundits who want you to go “all-in” because the markets are hitting new all-time highs. Be careful.



Andrew Zatlin

Editor of Moneyball Economics

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One Comment

  • James says:

    Hey Andrew,

    You mention in your piece that:

    “the U.S. economy has turned the corner. Companies aren’t profitable yet. But with a little organic growth in sales, they will be profitable again in 2017”.

    You talk about the economy “turing the corner”, but in your piece you talk about weakening employment, the higher probability of weakening retail/consumption growth, and broader corporate tightening. Can you please clarify where you are on your outlook, and what you mean by the “economy turning the corner”?

    Thanks in advance,

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