Market Hedge and Asset Allocation

Market Hedge and Asset Allocation

Since Trump rally began on Nov. 8,  financial stocks and infrastructure stocks had huge run.Goldman Sachs up over 30%,bank of America over 36%, among others.

This sprinter of financial stocks is totally due to Trump's promise to deregulate financial industry.
Based on Bloomberg's report, financial sector will probably engage on six reforms: capital requirement, small banks, shadow banks, stress tests, bank failure, and the Volcker rule. If president-elect Trump can be finalized as president tomorrow on electoral college vote, deregulation in financial sector will bring more risk-takers in lending and investing.

However,  the gains in financial stocks are building on hope, since deregulation will meet gigantic obstacle in Congress. In this regard, taking partial profit in the following financial stocks should be encouraged at this points: Goldman Sachs, Bank of America, Morgan Stanley,Northern Trust, J.P Morgan, etc. Also to hedge Trump's loss in electoral vote, it is prudent to trim some position in financial stocks.

Infrastructural stocks are also based on hope rather than facts. Anything in financial market based on hope is a little ahead of time, since right now nobody has faintest idea  on how to and when to start  rebuilding USA infrastructure, especially considering unpredictable Trump. The case in points: just after Trump won presidency-election, defense stocks-- Lockheed Martin and Northrop Grumman joined joyful  uptrend parade, but weeks later Trump smashed  Boeing and Lockheed Martin for high government military orders, upending those stocks run-ups.

If Trump indeed is president on Jan. 19, 2017, tech sector will possibly not have too much change as Trump said on Campaign at least during first year. Besides  last Wednesday Trump promised tech guys to serve them well. This is really confusing for Wall Street. On the other hand, Trump encouraged tech firms to back to USA by cutting their firms' tax. This is the main reason why most tech stocks have not participated recent rally without incurring meaningful pull back.Should crystal ball not appear in Trump plan next year, tech stocks would not take full relay baton to lead market until next April as usual.Some discrepancy between market perception and blurring reality exists here, providing a nice chance to profit from this market inefficiency.

Last week Fed raised federal fund rate by 25 basis points and promised another 3 raise in 2017. Market seems fully discounted this rate raise.But the market will face and figure out how the Fed to speed up rates hiking. Historically, hiking rates often happens in bull markets. When the Fed becomes hawkish, bond market and gold stocks will face headwind, while dollar  has tailwind. Do some asset re-allocation among bond, commodity and equity.

Chinese Yuan touched $0.14, devaluing  almost 6% after I said it had 7-15% devaluation room last year. But some market players predicted one US$ will be worth 7.4 Yuan. It may happen, but not guarantee. At this point, to my views, China's central bankers don't need to rush to defend its currency fall. Historically,  the price of financial vehicle seldom goes straight up to the sky from very bottom.


Gunning Ju

Market Analyst

From NYC