Prior to Tuesday’s US presidential election, there were many dire warnings about the stock market’s reaction to the election of a President Trump.
Analysts and economists expected markets to fall. Justin Wolfers at the Brookings Institution modelled a 10-15% decline for the market in the event of a Trump win. Jonathan Golub at RBC Capital Markets expected a 10-12% drop for equities.
On Tuesday night, this seemed to be falling into place. As the markets digested the ever-increasing odds of a Trump victory, stock futures collapsed, gold soared, and the market was in turmoil.
On Wednesday, however, all of those overnight losses were erased and stocks soared. In fact, in early trading on Thursday the Dow Jones Industrial Average broke through an all-time high and everything appeared right in the world.
So what happened?
Here’s a few reason we’ve heard:
- Markets know who the president is now: This may seem too simplistic, but markets really hate uncertainty. Not knowing the future president made investors and businesses nervous, but now that the picture is clear everyone can get on with their buying.
- Trump’s fiscal stimulus package will lead to increased business activity: Trump’s campaign proposed a $1 trillion package of public and private investment which would be even larger than President Obama’s bailout package during the financial crisis. Ideally, this would lead to increased business investment and economic activity and economic growth.
- Trump will roll back regulation on banks and other businesses: Trump has said that he will do away with regulations on business, including the Dodd Frank Act that put controls on financial institutions. It’s no surprise that the financial sector is one of the best performing of the last few days.
- Investors really like tax reform: Trump wants to lower taxes on companies and investors, which has been a favourite proposal of Wall Street’s for some time.
- Stocks usually go up: There wasn’t a collapse of the democracy or someone disputing the results or a violent transfer of power. If markets can get through World War II, it’s likely that they will continue their hundred year plus trend of going up and to the right.
This doesn’t mean everything is peaches in cream for stocks. Healthcare services stocks have been getting slammed since Tuesday with the possibility of a repeal of the Affordable Care Act. Tech stocks are getting rocked as well, with the tech-heavy Nasdaq down nearly 2% on Thursday and large players such as Facebook and Alphabet lagging.
Of note, many economists have also highlighted a possible increase in inflation, difficulty with trade, and a booming federal deficit as issues with Trump’s proposals.
So far, however, it appears the markets are focusing on what they like about President-elect Trump’s platform.