This Presidential election is sure to be remembered for a long time, not only for surprising result last Tuesday night, but also for the stock market reaction that has followed. In the weeks leading up to the election, the market appeared virtually certain of a Clinton victory, and seemed very sensitive to news about the Presidential campaign.
Then, on election night as the poll results were reported, it became evident that Trump would win in a stunning upset victory. The initial effect of this news on the stock market was extreme and immediate. Global stock markets declined during the overnight period, and early indications were that the U.S. stock market was poised for a substantial drop when trading resumed the following morning. But in a second surprise turn of events, the market rallied and has continued to climb, bringing the Dow Jones Industrial Average to a new all-time high.
Given the seemingly clear preference of the market for a Clinton victory prior to the election, the bullish market activity of recent days has been quite unexpected. Although it is too early to read too much into the market reaction, we are relieved that the widely forecast market decline that was expected to follow a Trump victory has not materialized. So, why has the market defied expectations and rallied following Trump’s upset victory?
In the near-term, we think this may amount to a “sigh of relief” that the campaigning, back-biting, and election uncertainties are finally over. This election cycle will be remembered for the excessive nastiness of the campaign and rhetoric. There were two candidates with very different plans for where the country’s priorities should be, and the negative tones and political uncertainty were creating a lot of tension among investors as well as voters.
We also think that, longer-term, investors may believe that the pro-Republican results and Trump’s pro-business, fiscally-stimulative agenda will have a positive effect on the economy. The results of the election provide an opportunity for the President and Congress to effectively make policy changes, as Republicans control both houses of Congress. Among the priorities for the Trump-Republican coalition are many that may encourage economic growth over the next few years.
- Reduce the regulatory burden on businesses – Over the past decade, there have been many newly implemented regulations that have slowed business activity and caused a great deal of uncertainty. Streamlining and improving some of these regulations could give business leaders more confidence to make capital investments and to take business risks.
- Income tax overhaul for businesses and individuals – Both Trump and Republicans in Congress have proposed significant changes to reform (and hopefully simplify) the tax code, which may be stimulative to the economy.
- New infrastructure spending – Trump has promised to commit significant resources towards improving our country’s aging infrastructure. If approved, new infrastructure projects will create thousands of new jobs in the near-term and foster economic growth in the longer-term.
In addition to the platform initiatives outlined above, investors may also believe that Trump’s position as a true political outsider, coupled with Republican control of the White House, House, and Senate, may soften the partisan politics and policy gridlock that have dominated legislative efforts over the past decade.
The concerns surrounding Trump’s Presidency are well publicized, but now that the election has been decided, we are hopeful that the positive market reaction signals investor confidence that Trump’s campaign bravado and controversial policy claims will be minimized in favor of a cooler temperament and well reasoned legislation.
If you would like to discuss our opinions, outlook, or your portfolio in greater detail, we would be happy to schedule a meeting or a conference call at your convenience.