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Donald Trump shocked the world on Tuesday, winning the U.S. presidential election. Those results confounded analytic data and pollsters that forecasted a big loss for Trump.
Stock market futures went sharply lower in the overnight trading after the election results became apparent. Overseas traders and snap-judgment reactions were bearish.
But there was an astounding market rally on Wednesday and Thursday. In the short term, investors are appeased that a Trump presidency will not be detrimental to the stock market.
At the same time, bonds dropped sharply post-election, sending interest rates higher. So we may not be out of the woods yet. More volatility is likely in the coming months.
What hidden sector is poised to benefit from the coming Trump presidency? My favorite under-the-radar ETF sector for 2017 is . . .
The Insurance Sector
The SPDR S&P Insurance ETF (NYSE: KIE) is the best way to play this group.
This top ETF is narrowly focused on the insurance sector, as opposed to financials ETFs that focus on a bigger group of stocks. Additionally, KIE is the largest and most liquid insurance ETF. It’s the only one that trades over 100,000 shares per day and has options trading available.
KIE holds a diversified basket of 45 different stocks, with no single holding over 2.7% of the total portfolio. This means that a single company doesn’t have a large influence on the ETF’s performance.
Regardless of the Fed’s snail’s pace in raising rates, longer-term interest rates have been rising globally for months now in the markets. And in the wake of Trump’s election, they’ve spiked higher.
The insurance sector generally benefits from higher interest rates. The financial sector as a whole does well because rising rates tend to mean a stronger economy and allow for higher profit margins for the group.
There is a correlation between higher rates and performance in financial stocks. And for insurance companies particularly, higher interest rates tend to directly boost their bottom line.
Additionally, Trump proposals including the dismantling of Dodd-Frank and Obamacare could be beneficial to the insurance industry.
Dodd-Frank and other post-mortgage-crisis regulations limit merger activity and the scope of investment activity in the financial sector. So, we could see increased M&A activity and increased diversified revenues during the Trump presidency if regulations are discontinued.
Several insurance companies have reported losses from Obamacare, with increasing negative risk going forward. A complete repeal of Obamacare would be beneficial to the group, as insurance companies would likely contribute to a replacement plan that gives them better prospects.
Outlook for KIE
Even if these events do not occur, there is both a long-term and short-term bullish price trend for the SPDR S&P Insurance ETF. And as the old axiom goes, “the trend is your friend,” which means you should ride with a strong trend.
As you can see on the weekly chart below, KIE has been in a consistent uptrend since 2012. And that strong performance shows no signs of letting up in 2017.
KIE Weekly Chart With 20- and 40-Week Moving Averages
This top ETF does tend to track the broad stock market S&P 500 Index. But it has outperformed the market over many recent time frames, including year-to-date in 2016. It’s quietly gained nearly 12% this year, while the S&P is up a bit under 8% ̶ that is 50% better than the market.
I anticipate further market-beating gains ahead in 2017 for KIE. The daily chart below show steady bullish momentum and strength in the trend, with the “Trump bounce” setting up a new bullish leg.
A Fibonacci Extension placed on the key 2016 low and the new all-time high we just reached in KIE gives an upside target for 2017 that is 13% higher than current levels.
And based on the potential Trump and interest-rate factors, I see potential further accelerated upside for this top ETF up to a 20% to 25% gain in 2017. Those returns would be similar to levels it has achieved previously in recent years.
KIE Daily Chart with Percent R & Fibonacci Extension
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