Financials and Materials ETFs Fly as Trump Talks, Markets Listen

When Donald Trump talks, stock markets listen. That much is clear from the gigantic ramp-fest that took place on Wednesday after the new president delivered his first State of the Union-style address …

• The Dow Industrials surged 303 points on the day, topping 21,000 for the first time. That milestone came only 24 trading sessions after the Dow hit 20,000, tying 1999’s record for the fastest 1,000-point rise in index history.

• The Nasdaq Composite jumped 78 points, closing to within a hundred points of the 6,000 level for the first time ever.

• The Russell 2000 Index of small cap stocks notched its own record, as did the Dow Jones Transportation Average and S&P 500.

Those gains reflect renewed optimism that Trump will boost economic growth by pushing through tax reductions, hundreds of billions of dollars in infrastructure spending, and deep cuts to stifling regulations. Trump also adopted a more compromising and conciliatory tone in his SOTU speech, something that might help shore up Republican (and some Democratic) support for his agenda.

But which ETFs are benefiting the most from Trump’s comments and initiatives? And does that say anything about which investments will likely generate market-beating returns in his administration?

I enlisted the quantitative analysis power of our Weiss Platinum ETF screening tools to help answer those questions. Specifically, I searched for which ETFs posted the biggest two-day returns through Wednesday’s close. I included only ETFs rated HOLD (C-) or higher, and I knocked out leveraged ETF products to make it a “fair fight.” Here is the resulting list:

You can see that materials and financials ETFs dominate the table. The PowerShares S&P Small Cap Materials Portfolio (PSCM, Rated “C-”) tied for first place with the Global X Copper Miners ETF (COPX, Rated “C”). Both showed returns of 3.47%. Those ETFs own the likes of Balchem Corp. (BCPC, Rated “B-”), AK Steel Holding Corp. (AKS, Rated “C”), Hudbay Minerals (HBM, Rated “D+”), and Southern Copper Corp. (SCCO, Rated “C”).

Multiple bank and brokerage-focused ETFs came next, led by the SPDR S&P Regional Banking ETF (KRE, Rated “B-”) with a return of 3.4%. It owns regional and super-regional banks like M&T Bank Corp. (MTB, Rated “B”) and PNC Financial Services Group Inc. (PNC, Rated “B”).

This outperformance shouldn’t come as much of a surprise to you because I have repeatedly highlighted the financials, infrastructure, materials, and defense sectors as key winners in a Trump presidency. In fact, I just published a special report called The Top 25 Financial Stocks Set to Clean Up in the Trump Administration to help investors like you profit from their gains.

Rising interest rates are one key catalyst for the financial sector. The improvement in economic data we’ve seen means the Federal Reserve is all but certain to raise rates by another quarter-point when it meets on March 14-15.

Another catalyst is fund flows. Individual investors are finally waking up from a years-long slumber, and re-allocating money from overvalued, lousy-return bonds to riskier assets like equities. ETF.com estimated that stock ETFs took in around $24 billion in February alone, while the Investment Company Institute estimated that $2.4 billion poured into stock mutual funds in the most recent week. Those were the biggest weekly inflows in a year.

So yes, extended markets can experience short-term pullbacks at any time. But our Weiss Ratings data shows that those sectors I highlighted earlier continue to outperform – and should be great buys on any temporary corrections.

Until next time,

Mike Larson