Mr. Nasdaq Goes to Washington
While market pundits drone on about being on the right side of the Trump Trade in Industrial and Financial stocks, two other sectors that I focus on have actually led the market this year based on their fantastic earnings growth.
Technology and Healthcare surprised lots of investors who thought that the new administration would not be favorable to innovation built on offshore labor, tax havens, and hard-to-comprehend drug prices.
But these "twin titans" of the Nasdaq 100 index found a unique ally in the new president and the fruits of their DC discussions this year are paying off big-time for investors who see the 3 signals.
Signal #1: Trump Likes Tech
The CEO's of Silicon Valley giants like Apple, Google, and Amazon have been summoned to Washington several times since November. At first, it appeared that they were made to squirm for relying on foreign labor for their products, tax shelters for their cash hoards, or criticizing the president for his immigration policies.
But a key technology leader who was also a Trump supporter, Peter Thiel, co-founder of PayPal and the first outside investor in Facebook, must have convinced them that the new president was not anti-innovation and that good things were coming.
This week it became very clear that the administration was indeed a friend of Tech as White House advisor Jared Kushner held another meeting of the top leaders and asked for their help in rebuilding the IT infrastructure of the federal government.
Kushner leading the innovation push is a great sign for investors in the Tech megatrends of mobile, cloud computing, and automation. I thought it was a no-brainer to be buying these stocks in January and I have even more reason to think so now.
And all you need do is look at the charts and the earnings momentum -- via the Zacks Rank -- to make your picks in a technology expansion cycle that is far from over.
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Signal #2: Trump Hates Regulation
This is the biggest reason the banks rallied so hard right after the election. Investors in the Financial sector knew he would go after the shackles of Dodd-Frank.
And while the "repeal and replace" of Obamacare isn't going very smoothly, there is a silver lining for the Healthcare sector: any "executive order" on drug pricing controls is likely to remain favorable to pharmaceutical companies.
The reason is one I've been talking about for years, using Gilead's $84,000 cure for Hepatitis-C as an example. The insurance companies will gladly pay for that innovation because it is far cheaper than a new liver, which can cost about $500,000 "installed."
And to my pleasant surprise, I found out last week that a key ally is already consulting in the White House: Joe Grogan, OMB's director of health programs, spent the last five years leading federal affairs for Gilead Sciences.
While Healthcare has recovered this year, it's still in the "sector cellar" on a 2-year basis. That is slowly changing as innovation gets its due again amidst the megatrends of an aging population living longer, in the era of science for longevity.
Signal #3: Trump Wants Growth
We all know the president would like to see the economy return to 4% GDP growth. Whether that's probable -- or even possible given the structural evolution of a technologically mature economy -- is a topic of much debate among PhDs and money managers.
But one thing is for sure: the president will enact many pro-growth policies and put the odds in favor of many quarters of 3%+ GDP. This will stimulate job growth, wage growth, and probably inflation.
And those three gifts come from corporate capital expenditures, whether for new plant and equipment or new cloud servers, software and mobile devices. Just as Washington is waking up to the power of cloud computing and automation to become more efficient, the largest corporations are still in the early stages of their conversion.
While many large and sophisticated Tech investors have already been calculating their returns if Trump gets a corporate tax cut passed and/or if he cuts a deal to "repatriate" hundreds of billion in overseas cash, the best news in my book is that Trump likes Tech... and Biotech.
So my bet is this: the Nasdaq will continue to lead the market in 2017. And not just the mega-cap 100 index. Lots of smaller "satellites" will benefit from the big trends. I'll be using the Zacks Rank plus my favorite technical analysis tools to find as many as I can.
How to Capitalize on These Signals
Tech has strongly led the market's advance to new highs this year because that's where the extraordinary earnings growth has been.
Trump's commitment to economic growth is likely to solidify this trend well into the foreseeable future.
But while the Nasdaq (and other benchmarks) as a whole will continue to climb, some stocks will be much bigger winners than others.
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Kevin, Senior Stock Strategist at Zacks, is a leading expert in technical analysis and what makes markets move. He provides commentary and recommendations for Zacks TAZR.
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