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Stock Surge Rides the Tech Wave -- WSJ

1 Apr 2017 6:32 am

Investors shed 'Trump trade' wagers -- banks and industrials -- to bet on growth shares
By Corrie Driebusch 

The S&P 500 posted its biggest quarterly gain since the end of 2015, as a brightening economic outlook offset investors' waning enthusiasm for the "Trump trade."

The index's 5.5% rise in the first three months of the year extended postelection gains that have sent major U.S. indexes to records, but the most recent move higher reflects a change in the bets that are fueling the rally.

Investors dialed back on shares expected to benefit from changing U.S. policy following the presidential election and piled into technology companies, wagering that a stronger economy would amplify their growth potential.

The tech sector in the S&P 500 jumped 12% in the first three months of the year, by far the best performer out of the 11 sectors in the index. The tech-oriented Nasdaq Composite Index ended the quarter up 9.8%, its best quarter since 2013.

During this shift, stocks have remained calm and pullbacks have been relatively minor, highlighting the continued strength of the eight-year bull market. The CBOE Volatility Index, known as Wall Street's "fear gauge," posted its second-lowest quarterly average on record. The average daily percentage change for the Dow Jones Industrial Average during the quarter was the lowest since 1965.

"The market's been resilient because the data has been reasonably solid, " said Joseph Amato, chief investment officer of equities at asset manager Neuberger Berman. While there has been "noise and bluster" coming out of Washington, economic data have been getting better and confidence indicators are strong, he said. That all supports the market's climb.

But the rally's leaders have changed. Investors have been pulling back from banks and infrastructure companies, a reversal of some popular postelection trades. The S&P 500's financial sector fell 2.9% in March, while industrials declined 0.8%.

The Dow Jones Industrial Average, which has a hearty weighting of industrial companies and big banks, posted a 4.6% gain, a slowdown from the previous quarter.

On Friday, the Dow industrials fell 65.27 points, or 0.3%, to 20663.22. The blue-chip index dropped 0.7% in March, its biggest monthly decline since October. The S&P 500 fell 5.34 points, or 0.2%, to 2362.72. The Nasdaq Composite dropped 2.61 points, or less than 0.1%, to 5911.74.

The failure of Republicans' health-care bill, intended to replace the Affordable Care Act, has led investors to question the Trump administration's ability to implement other agenda items like a corporate tax overhaul, looser regulations and fiscal spending.

Instead, investors have turned to companies that have generally served up better-than-average returns since the financial crisis: large technology companies.

Apple Inc., a component in the three major indexes, jumped 24% in the first quarter, lifted by solid sales for its new iPhone, high hopes for the next model and stabilizing revenue out of China. Apple's rise added more than half a percentage point to the S&P 500's quarterly gains, according to S&P Dow Jones Indices.

Growth stocks, companies that many investors expect to post stronger earnings in times of a prospering economy, have outperformed value stocks, or those whose shares appear cheaper compared with their earnings. The Russell 1000 Growth index ended the quarter up 8.5%, compared with the Russell 1000 Value index's 2.6% rise.

That comes as the U.S. economy has continued to show signs of strength this year. The personal-consumption expenditures price index, the Federal Reserve's preferred inflation gauge, exceeded the central bank's target for a 2% annual gain for the first time in nearly five years, at 2.1%, the Commerce Department said Friday, a day after it said U.S. economic growth in the fourth quarter was revised up from earlier estimates.

Optimism among business owners and investors also has climbed. The National Federation of Independent Business said in February that its index of small-business optimism reached its highest level in a dozen years in early 2017, and a University of Michigan survey released in March found consumers feel better about the economy than they have in the past 17 years.

"A lot of people are saying the Trump trade is over, but I think the rally is predicated on fundamentals, not on Donald Trump," said Jeff Schulze, investment strategist at ClearBridge Investments.

Still, some investors are concerned that first-quarter GDP could be weak, with the Federal Reserve Bank of Atlanta's GDPNow tracker forecasting economic growth at a 0.9% pace.

Write to Corrie Driebusch at corrie.driebusch@wsj.com

(END) Dow Jones Newswires

April 01, 2017 02:32 ET (06:32 GMT)

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