Actionable insights straight to your inbox

Equities logo

Beat Market Uncertainty by Rotating Within, Not by Exiting in 2017

How investors can stay and play in May.
Luis Aureliano is a business writer and financial analyst. With over 15 years of experience in global finance and an MBA in economics and management, Luis’s areas of expertise include business, marketing, communications, personal finance, macro economics, stocks and emerging markets.
Luis Aureliano is a business writer and financial analyst. With over 15 years of experience in global finance and an MBA in economics and management, Luis’s areas of expertise include business, marketing, communications, personal finance, macro economics, stocks and emerging markets.

Geopolitical uncertainty surrounding the Trump administration and its proposed policy changes could see markets reverse their upward trajectory that they have experienced in the past few months since November 2016. The positive investor sentiments that have been driving the markets higher were pegged on some of the proposed policy changes by the Trump administration. With the continued delay in passing most of these policies, we could potentially have a reversal in the current investor hype and turn the markets to a downward trend.

Speaking on CNBC, Sam Stovall, CFRA chief investment strategist noted that “What we’ve been experiencing right now is the Trump hype, and I think what we’re worried about is it morphing into the Trump gripe.” Stovall also added that “Investors are basically excited, but nothing is really coming through.”

Trump had campaigned on tax reforms and infrastructure policies that have not been passed yet, and are now facing uncertainty at the Congress. Failure of Trump’s healthcare reforms, which were taken off the table before even the House could vote on them; spells more doom on investor expectations on the ability of the Trump administration to deliver on its promises. With the continued frustration of Trump’s plan at the Congress, investment analysts project that stock markets will have a correction of between 10 percent and 20 percent as we move closer to 2018. This presents a great opportunity for CFD Trading on the rising and falling markets; although on the other hand long-term equity investors will find themselves booking huge loses as the market gets volatile.

Trading Equities in A “Six Month Defensive, Six Month Cyclical” Approach

Volatility in the stock market increases the investment risk, and equity investors therefore need to be braced for tough days ahead. Stovall proposes that all equity investors and traders need to have a “winning investment approach” for trading equities all year round without sinking into the red. Traditionally, as April comes to an end, equity traders tend to adopt the strategy of “sell in May and go away”. However, Stovall advises that with the looming uncertainty with regard to the turn President Trump’s policy agenda will take; rotating within the market instead of exiting in May will be the winning strategy.

Stovall advised that “You are better off rotating than retreating. Basically, like whitewater rafting, you let the market take you where it needs to go and in the summertime, it traditionally wants to go defensive.” Having been in the market for six months from November 2016 to April 2017, Stovall proposes that instead of selling off your stakes and exiting the market; you can rotate into a 50 percent exposure to consumer stables and 50 percent exposure in healthcare. You should then hold these stocks until October 2017 in order to complete the “six month defensive, six month cyclical” investment approach.

According to the investment strategist, in case the Trump rally comes to a halt as investor confidence dwindles; the “six month defensive, six month cyclical” investment approach could help cushion the investors and prevent them from sliding into the red. This strategy could help investors move out of the cyclical stocks such as the financials and materials in May; and then return back in November 2017 once the cycle begins again. Within the 6 months period between May and November, investors could still be gaining from the defensive stocks such as consumer staples and healthcare.

Exiting the market in May is the obvious way to book in your profits early, and wait for the next investment cycle starting in November 2017. However, the defensive sectors generally tend to lose less when the market goes down; hence selling the cyclical stocks and buying the defensive stocks will help you to remain in the market without losing out over the next six months.

A weekly five-point roundup of critical events in fintech, the future of finance and the next wave of banking industry transformation.