Election Day may have been a 'turning point' for investment strategy

As traders bet on stocks that could do well during a Donald Trump presidency, just the fact that they're making readjustments is likely to help the broad S&P 500 index rally.

Trump's election win spurred hopes for major infrastructure spending and business-friendly tax policies, and for greater economic growth overall. Relief over a smooth Election Day, despite the Trump upset, helped stock index futures recover from an overnight plunge and sent markets surging over the next two trading days as investors piled into financials, health care, industrials and materials stocks.

Traders sold "safe" stocks in areas such as utilities and consumer staples.

"What really comforts me is all the money coming out of those safe haven trades. ... Now money is being reallocated to where it is going to be treated best," said Dan Veru, chief investment officer at Palisade Capital Management. He said leadership in the financials is "hugely positive," while the gains in industrials and materials indicated optimism on economic growth.

"At the end of the day, you're seeing a broadening out of the market — incredibly positive," he said.

While just two of the S&P 500's 11 sectors posted gains between the S&P 500's Aug. 15 high and Election Day, the number of positive performers has broadened to six since the election.

The difference between the winners and losers was most striking the day after the election, at 7.8 percent, said David Lefkowitz, senior equity strategist at UBS Wealth Management Americas. He said the spread has only been larger on a daily basis less than 2 percent of the time since 1990, representing just how much investor repositioning was going on.

"I think this is a turning point in the outlook for growth and inflation to a certain extent," he said.

Industrial and financial stocks helped the Dow Jones industrial average close at a record Thursday, and several analysts said likely continued gains in those sectors could help the S&P break higher as well. The index was within 2 percent of its all-time high in intraday trade Friday.

"This could be another mean reversion play" — in which stocks briefly rally only to give up gains several months later — "or this could be finally a move higher towards a higher plateau of economic growth," said Ed Clissold, chief U.S. strategist at Ned Davis Research.

Clissold's firm began recommending bank stocks a week before the election, and tech is the only other sector it's currently recommending, he said.

Here's the top three performers since the election:

Financials — As of Thursday's close, the financials had rallied 7.9 percent since the close on Election Day. Banks are a key beneficiary of higher growth prospects, the likelihood of less regulation under Trump and better profitability from this week's jump in the U.S. 10-year Treasury yield above 2 percent — its highest level since mid-January. Shares of Morgan Stanley, JPMorgan Chase and several other major banks hit 52-week highs on Friday.

Health care — Hillary Clinton's comments against high drug prices had weighed on the sector, and defeat of Prop 61 in California removed further political worries on the pharmaceutical stocks. As of Friday morning, the iShares Nasdaq Biotechnology ETF (IBB) was up more than 13 percent for the week, on pace for its best week ever.

Industrials — During his campaign, Trump pledged multibillion-dollar investment in infrastructure, and increased defense spending. Stocks such as Caterpillar hit 52-week highs on Friday, and Northrop Grumman shares hit 52-week highs Wednesday.

Worst performers since the election:

"Even though there's some readjusting, the sectors that are getting hit are relatively small. It shouldn't stand in the way of the market making new highs." -David Lefkowitz, senior equity strategist, UBS Wealth Management Americas

The jump in Treasury yields and better growth prospects hurt sectors that investors usually buy when benchmark yields are low.

Utilities — The sector of high-dividend stocks fell about 6 percent between the election and Thursday's close, as higher Treasury yields made the utilities' yields less attractive. Utilities like PG&E supply basic household heating and water needs, adding to their attractiveness when the broader market or economic expectations are falling. The sector was the best performer in the first month and a half of the year, when the S&P fell more than 10 percent.

Consumer staples — Like utilities, the sector includes companies such as General Mills and Wal-Mart that sell common household products.

Real estate — Property stocks have been weak since the sector was broken out from the financials in September, and higher Treasury yields made the real estate stocks less-appealing investments.

"Even though there's some readjusting, the sectors that are getting hit are relatively small," said Lefkowitz of UBS. "It shouldn't stand in the way of the market making new highs."

Tech shares take hits too

That said, the technology stocks have reversed from market leaders before the election to a weight on the broader market. The tech-heavy Nasdaq fell 0.8 percent Thursday, despite the Dow's record close.

Some analysts said the large tech stocks such as Apple or Microsoft had been viewed as safety investments that traders were now pulling out of, while others said Trump's unfriendly immigration stance could hurt the tech giants' ability to hire high-skilled, foreign workers.

Analysts did point out that the ingredients for further gains in the S&P 500 were already in the market ahead of the election.

Third-quarter earnings look set to end about a year of declining earnings per share, while the first read on third-quarter gross domestic product showed 2.9 percent, the fastest pace in two years.

Buying interest in financials away from safety stocks had begun in the last few months as Treasury yields crept higher in anticipation of a Federal Reserve rate hike in December. Add potential tax cuts and repatriation of cash from overseas under a Trump presidency, and the corporate growth environment looks good to many analysts.

"As long as you're seeing these cyclical sectors outperform, the market is saying (expectations of) this recovery is a lot greater than a few weeks ago," said Bruce Bittles, chief investment strategist at Baird.