Economic optimism, ‘animal spirits’ drive latest ‘Trump trades’: Goldman Sachs

Seeking Alpha News (Sun, 26-Jan 12:23 PM)

The re-election of President Trump has led investors to seek stocks whose values are most likely to rise amid shifts in federal policy and spending priorities. Optimism about economic growth and the unleashing of “animal spirits” – as economist John Maynard Keynes described the uncertainty that affects investor sentiment – are two key “Trump trades,” according to strategists at financial-services firm Goldman Sachs.

“With the S&P 500 (SP500) surging back to its post-election highs amid a wave of executive orders and policy announcements, our recent conversations with clients revealed a high degree of uncertainty regarding how much the market has moved to price the Trump policy agenda and how much remains to be priced as that agenda becomes reality,” David Kostin, strategist at Goldman Sachs, said in a January 24 report.

Stocks of cyclical businesses, such as manufacturers, airlines and restaurants whose profits are most sensitive to economic growth trends, were among the strongest performers after Election Day. Stocks of defensive businesses such as makers of consumer staples, healthcare providers and utilities, didn’t perform as well.

“Cyclicals outperformed defensives by 6 percentage points on Election Day and have continued to outperform by an additional 4 percentage points since then, outpacing the strength of recent economic data,” according to Goldman Sachs.

A measure of “animal spirits” was seen in recent survey data such as the Small Business Optimism Index published by the trade group National Federation of Independent Business. The index surged from a reading of 94 in October to 105 in December, “the largest two-month increase on record,” Goldman Sachs said.

That improvement in sentiment has helped to boost stocks exposed to small-business spending, which Goldman Sachs has grouped into a basket of about 60 stocks, 10 of which are listed below.

Meanwhile, the possibility of lower taxes does not appear to have affected stock values, according to the bank’s analysis. Its baskets of stocks that are sensitive to the corporate tax rate “recently traded roughly in line with its macro relationships, reflecting little expectation of impending tax reform,” Goldman Sachs said.

Congressional action such as extending key parts of Trump’s 2017 tax plan would affect earnings for the Standard & Poor’s 500 stock index by 1%-2%, the bank said.

Goldman Sachs: Constituents of GSRHSMBX (Top 10 by Exposure to SMBs), January 24
Company (Ticker)  Share of revenue from small- and medium-sized businesses
AVC Auctions (ACVA) 100%
Agco (AGCO) 100%
Corteva (CTVA) 100%
DigitalOcean Holdings (DOCN) 100%
EverCommerce (EVCM) 100%
Groupon (GRPN) 100%
Idexx Laboratories (IDXX) 100%
Payoneer Global (PAYO) 100%
Weave Communications (WEAV) 100%
Bill Holdings (BILL) 95%