The Pricing of Policy

Estimated reading time: 7 minutes

Buyers Are Back in Town

Week one of a new administration is here and so far markets have greeted it warmly. There was an added friendliness to the trading environment pre-inauguration with the 10-year Treasury yield falling more than 20 basis points (bps) in a week on the heels of inflation data that came and went without any big scares. 

Even though we’re only a few days into the new presidency and there is still a lot of uncertainty around policy actions, it’s important to start watching for patterns in sector behavior and factor returns to inform our expectations.

This piece is titled “The Buyers Are Back in Town” and they seem to have renewed interest in parts of the market that can benefit from deregulation (Financials) and domestic economic strength (Industrials, Materials, Utilities). This is different from what we saw at the end of 2024 and the first week of 2025 when investors loaded up on “old faithful” mega-cap technology stocks in the face of broader market uncertainty.

Sentiment once again seems to have turned more bullish in anticipation of a pro-growth business-friendly administration. One way to look at investors’ psyche is to measure the action in broad market put and call options. In short, puts are what investors may use to buy protection from downside risk, while calls are what investors may use when they expect upside.

The chart below shows the put/call ratio for equity index options (magenta) and the CBOE skew index (blue), which is a measure of tail risk. The basic premise is this: When investors are buying more puts than calls (put/call ratio rising), they’re acting in a more cautious manner. When investors are buying more calls than puts (put/call ratio falling), they’re expecting the index to rise. Over the past two weeks, the put/call ratio has fallen and tail risk has risen. You might interpret this as conflicting signals, but the message is that investors are expecting tail risk on the upside. The words risk and volatility don’t always mean downside, they’re mathematically just expressions of how big the movement could be. 

Again, we’re looking at a very short timeframe, and not one we should base long-term investment decisions on, but at the very least it shows the current optimism that’s being baked into markets.

Surveying Sectors

Throughout the early part of this year, we’re bound to see countless charts about what has historically happened in the first year of a presidential term. Take these with a grain of salt as every term and every environment is driven by different things, but one that we find more compelling is regarding sector performance.

The sectors that have historically done the best in the first year of new administrations are Financials and Health Care, with Energy and Consumer Discretionary holding up well, too. 

Financials have been by far the most positively impacted by a change in leadership, and perhaps it’s no coincidence that the current consensus view on them is bullish. It is also a sector that’s expected to benefit from possible deregulation and a resulting increase in capital markets activity (IPOs, mergers & acquisitions, trading revenue, portfolio management fees, etc). 

A natural question might be: If everyone is bullish on something, isn’t that a contrarian indicator? Sometimes, yes. You don’t want to be the last person in the door of a crowded trade. But other times, the fundamental story is supportive of the bullishness and we shouldn’t overthink it too much.

So far this earnings season, Financials have posted upside surprises and given investors more reason to like them. When you have a blend of fundamental support and future optimism, it may indicate that there’s still more opportunity to come… even in places that are already widely liked.

We are also encouraged by the historical performance of Health Care on the chart above, as it’s a sector we called out as an interesting opportunity for investors in 2025. Our thesis on Health Care was that it presents an attractive valuation profile at a time when broad market pricing feels high, and that certain industry groups within Health Care – namely, Pharma and Biotech – could be beneficiaries of investors looking for growth in places outside of technology. Perhaps we can add to that list that Health Care tends to have momentum at this point in the political cycle as well.

Figuring Out Factors

Speaking of momentum, the last pattern we want to highlight is that of factor performance. Factors are ways of splitting up the stock universe into different drivers of performance. Some of the most common factors discussed are size (large-cap versus small-cap), style (growth versus value), and momentum (short-term price movement).

Over the past week, the biggest drivers of market performance have been stocks with strong momentum, growth qualities, and larger market cap. The weakest factors have been low volatility and dividends – both of which are traditionally more defensive in nature – which is further indication of the optimism that has returned to markets. 

There are healthy signs in these patterns, particularly that strong performance is again evident in places beyond mega-cap tech as market concentration can pose its own variety of risks. But much like the period post-election, it’s probably only a matter of time until the commentary changes back to worrying about going too far too fast. 

We expect that to be the theme of these early months under a new administration – the tug-and-pull between optimism and volatility as we slowly gain clarity on market-moving policy actions. Regardless of the current healthy risk appetite and broadening out of market strength, this is still a time fraught with headline risk and many unanswered questions. Even if the general trend is upward, there are bound to be bouts of whiplash and reversals, which makes keeping a cooler head critical to investing success. Diversification is now important not just from a volatility standpoint, but from an opportunity standpoint too. New year, new administration, new investing eyes. 

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