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The Boost in Basic Materials Is Just the Beginning

There's a seismic shift underway as fiscal stimulus pushes basic materials higher

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For years, traders on Wall Street have been focused on central banks, and rightly so. The Federal Reserve’s Federal Open Market Committee, the European Central Bank, the Bank of Japan and the People’s Bank of China have been the primary drivers of market activity.

Their willingness to lower interest rates and buy bonds and other assets through their quantitative-easing (QE) programs has boosted stock-market returns far above what they would have been without these dramatic efforts. However, a seismic shift is underway.

The election of Donald Trump has changed everything. No longer are traders focused solely on every whisper and rumor swirling around the central banks and their monetary policies. Suddenly, traders are focusing on fiscal policies again, especially in the United States.

For six years, the U.S. government has done little to stimulate the economy, as Congressional Republicans have been in a standoff with the President. Continuing resolution after continuing resolution to fund the government are not what fiscal-stimulus dreams are made of. But with Donald Trump preparing to step into office on Jan. 20, Washington, D.C. is electric with the possibility of billions of dollars of infrastructure spending, tax cuts, regulation overhauls and health care reforms.

The Seismic Shift for Basic Materials

The shift in focus from monetary-policy stimulus to fiscal-policy stimulus has been a boon for the basic-materials sector. While the idea of massive infrastructure projects tends to get the lion’s share of media attention for basic materials, it’s not the only bullish factor boosting the sector. The potential reduction, or elimination, of various environmental regulations, lower corporate tax rates and less governmental resistance to large mergers and acquisitions are just as important in the minds of the analysts and investors in the sector.

Here’s the exciting part: These changes are going to take a while to be fully fleshed out and implemented, which means that the initial bump we’ve seen in the basic-materials sector is likely just the beginning. The first half of 2017 could be a profitable time for the sector as mining, drilling and production ramp up in the industry.

Take a look at the Materials Select Sector SPDR Fund (NYSEARCA:XLB), for example. As you can see in Fig. 1, even though the fund has risen more than 7% since the presidential election, it still hasn’t climbed all the way back up to its multi-year high of $52.22.

Materials chart
Source: Fig. 1 — Daily Chart of the Materials Select Sector SPDR Fund (XLB)

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