Triumphant Trump Rally: Will it last?

The financial news media for months predicted a crash in the stock market if Donald Trump were to win the elections. As was confirmed in the early hours of November 9th, Donald Trump has been elected the next President of the United States of America yet the U.S. stock market is at fresh all-time highs.

During the hours and days following the results, the media continued to talk about “shock” and “fears” about what Trump’s victory means for the U.S. I personally* question why the media was so shocked by his win, especially following the U.K. general elections and more recently the Brexit vote. The financial media only started to talk about the likely positive economic impact of a businessman leading the executive office after the financial markets stormed to new highs in the U.S. The S&P 500 has now registered its third weekly gain.

S&P 500 closed the week at new all-time highs (weekly chart 2014-2016)

During the early hours following election day however, investors’ emotions took control. Driven by fears, investors dumped stocks left right and centre and piled into safe havens. S&P 500 futures fell 5% as it became clear Clinton’s chances of winning became thinner and thinner. Simultaneously, gold spiked 5%. By the end of U.S trading however, all these moves reversed and the stock market closed green on the day (S&P 500 closed up over 1%, a more than 6% intra-day reversal). These moves echoed market fears during the Brexit results.

Interestingly, the Wall Street Journal reported that, according to Lipper, investors placed more money into stock Exchange Traded Funds (see more on ETFs here) following the election than any other week in history. Surely this should be interpreted as a bullish argument for further upside over the next few weeks and months?

These events highlight an important lesson: the markets’ initial reactions to events are not always right. Far from it. Understanding the key drivers in large moves like these gives an investor an edge over the others, who are likely making emotional decisions and following the herd.

So what has caused this post-election burst higher in the stock market? Investor’s believe the Trump administration will be more business friendly than the outgoing Obama administration. With the Republicans controlling both houses, Trump can follow through on many of his pro-business policies. Importantly however, while infrastructure spending, lower corporation taxes and less regulation would be welcomed, they may take many months to enact. In the meantime, the economy will likely be facing further tightening in interest rates by the Federal Reserve.

The recent rally in the transportation, financial, industry stocks in addition to the small-cap Russell 2000 (which has risen for its 15th straight session) suggests investors now see a light at the end of what seemed like a very long and dark tunnel. President-elect Donald Trump may not be so bad for the U.S. economy after all and may provide the economy with a much-needed boost in the form of a fiscal stimulus package. Long-term pessimism has never paid. Maybe optimism will? Time will tell.

* Whilst I did not align myself with either candidate, during September, I tweeted the following: “I wonder how significant the number of people who are quietly supporting Trump is… I guess we find out soon enough.” I simply believed that due to the negativity of the press (and social media) over Trump, many of his supporters were likely to silently vote for him – similar to what occurred during the Brexit vote.