What Comes After The Trump Rally?

The market has ripped 5% higher in just the few weeks after Trump’s nomination.

But the rally isn’t coming from the largest companies that are weighted more heavily in the S&P 500. In fact, these companies aren’t performing well at all.

Here are the performances of 10 of the top companies in the S&P 500 that make up nearly 20% of the entire index:

Apple (AAPL):  Down (3% weighting in the S&P 500).

Microsoft (MSFT):  Flat (2.5% weighting in the S&P 500).

Exxon (XOM): Up 5% (2% weighting in the S&P 500).

Johnson & Johnson (JNJ): Down (1.6% weighting in the S&P 500).

Berkshire Hathaway (BRK-B): Up 10% (1.6% weighting in the S&P 500).

JP Morgan (JPM): Up 20% (1.6% weighting in the S&P 500).

Amazon (AMZN): Down (1.6% weighting in the S&P 500).

General Electric (GE):  Up 5% (1.5% weighting in the S&P 500).

Facebook (FB): Down (1.4% weighting in the S&P 500).

Wells Fargo (WFC): Up 20% (1.3% weighting in the S&P 500).

Astute readers will notice that only banks and “companies that make things” are the ones that are doing well.

The common denominator is the cost of capital.

Interest rates are going up: which just hands money to banks.

Banks play an arbitrage game – where they play their massive portfolios of long-dated, super-low interest rate bonds against the new short-term, higher interest rate bonds.

Meanwhile, oil prices moving up reward the usual energy sector players.

Higher oil prices spark inflation.

Traditionally inflation kicks off economic activity because it sparks inventory building. (The idea here is if I know prices will be going up a few months from now, I better buy today, in advance of higher prices tomorrow.)

Inflation reinforces the need for higher interest rates because that’s the Federal Reserve’s mantra.

So that’s the framework for the rally. On the one hand, banks get handed a big check courtesy of higher interest rates. On the other, industrial activity will perk up.