It was the quarter the Trump trade died…and the market didn’t seem to mind.

Yes, the Dow Jones Industrial Average rose 4.6% to 20,663.22 during the first three months of 2017, its sixth straight quarter of gains, while the Standard & Poor’s 500 index gained 5.5% to 2,362.72, and the Nasdaq Composite climbed 9.8% to 5,911.74, its best quarter since 2013.

But the market produced those gains without much help from the sectors that surged following the November presidential election—the ones that were supposed to benefit the most from the policies proposed by President Donald J. Trump. The S&P 500 Industrials index, which was supposed to benefit from increased infrastructure spending, rose 4%; financials, which would benefit from scaled-back regulation, advanced just 2.1%; and energy tumbled 7.3%. Instead it was the anti-Trump stocks that led the way higher, with technology gaining a whopping 12%. “Tech was left for dead after the election,” says Rhino Trading Partners’ Michael Block. In 2017, it has been the market’s best performer.

The rotation out of what had worked and into what hadn’t has removed a lot of the excesses from the market. The S&P 500 dipped 0.04% during March, and Block notes that as of Thursday night, 50 of the 997 stocks in the Russell 1000 index (yes, 997) were overbought based on the 14-day Relative Strength Index, which measures the speed of price movements, while just 11 were oversold. “That leaves the overwhelming majority in the middle,” Block says. “We are banging around in a range here.”

And it isn’t just stocks that have been doused with a bucket of cold water. The latest American Association of Individual Investors survey shows the percentage of bullish respondents fell to 30.2%, 16 points lower than the start of the year, while bearish sentiment rose to 37.4%, 12.2 points higher. “The market got ahead of itself and was due for a pause,” says SunTrust strategist Keith Lerner. “The good news is that a lot of the sentiment measures have cooled off.”

And why shouldn’t they? Just over a week ago, Trump’s health-care plan died in Congress, and investors were worried it meant the remainder of the administration’s pro-growth agenda could hit roadblocks on the way to becoming law—or not. Those concerns caused the S&P 500 to drop 1.2% on March 21, only the second move of 1% or more in either direction this quarter, the fewest such moves since 1995. That alone was enough to worry investors in the AAII survey: 43% said the lack of downward volatility made them more bearish.

You wouldn’t know it from looking at the market last week, however, as stocks bounced back from the previous week’s losses. The Dow Jones Industrial Average advanced 0.4% last week, while the Standard & Poor’s 500 index rose 0.8%, and the Nasdaq Composite gained 1.4%. Natixis Global Asset Management strategist David Lafferty attributes the rebound to Trump’s ability to pivot away from the health-care disappointment to talk about tax cuts. “The market changes its narrative when Trump changes his mind,” he says.

But maybe the rally has less to do with Trump and more to do with the fact that global economic data has been consistently strong. Last week, the final reading of fourth-quarter gross domestic product showed growth of 2.1%, above forecasts for 2%. The Conference Board’s measure of consumer confidence surged to its highest level since 2000, and that was just in the U.S. SunTrust’s Lerner notes that 84% of countries have been showing expanding manufacturing activity, the best level since 2014. “A solid synchronized global recovery has been in place that goes beyond the winner of the U.S. election,” he says.

The Trump trade is dead. Long live the Trump trade.

(Source: Barrons Online)