Dow Jones closed at a Record High after Trump’s VictoryPosted on December 15, 2016 in Blog • General Blurps
Many people expected Donald Trump's victory in the elections to spook investors, due to his campaign, which was characterized by what people considered promises of divisive and protectionist trade actions. The media had forewarned that Trump's victory would be a doomsday for the stock market, because his anti-trade policies would result in sharp slowdown like that of the British, which came after the country voted massively to withdraw from the European Union. In his prediction, Professor Johnson; an economist from the Massachusetts Institute of Technology, asserted that Trump would drive Europe into a recession, which will cause a serious banking crisis that would affect many countries including the U.S (Sorkin, 2016).
However, it is now evident that the media and the professor's assertions were hyperbolic statements whose main aim was to cause fear to the American voters. On the second day after Trump was elected, a majority of investors on Wall Street were in a confident spirit with the Dow Jones industrial average hitting a record high. But what exactly made stock markets like Dow Jones hit a record high?
This paper will analyze five reasons that made the stock market rise after Trump's victory.
Dow Closes At Record High Since 2011
One of the major reasons that made Dow Jones hit a record high is the fact that investors started to become confident that Trump's promises would go beyond his anti-trade rhetoric. Experts contend that by their nature, markets have been made to look beyond the moment and into the future. For this reason, the bounce back of stocks after Trump won the election is a reflection of the bet that was made by many investors.
These investors had confidence that Trump promises would concentrate more on creating platforms that would encourage trade. Investors started becoming assured with the change of Trump's tone and his lack of reference to build a wall across the Mexican border. Trump also became soft on Janet Yellen; he had promised to sack her once he became president (Farrell & Wearden, 2016).
After Trump won the election, many investors started to believe that the change of regime and the promise of tax cuts at both the individual and corporate level would benefit companies. American companies would have an opportunity to repatriate their foreign cash holdings for a reasonable penalty (Imbert, 2016). Besides cash repatriations, many investors began to consider the prospects of higher infrastructure spending; an activity that would immensely boost the economy. As a result, many investors began to reallocate assets by increasing exposure to Financials and industrials, while lowering positions in sectors like utilities, real estate and consumer staples (Imbert, 2016).
Many investors became optimistic that Wall Street will go on the offensive. This implies that, instead of defending itself from the new regulations, big banks will engage in competition to soften the rules that were implemented after the 2008 financial crisis, through the 2010's Dodd Frank Wall Street reform Act (Heath, 2016). Trump promised in his campaign that he would help to dismantle the law. The Dodd Frank rules forced financial institutions to hold more capital and undergo an annual stress test in order to prove that they could be able to withstand another economic meltdown with help from the taxpayer (Heath, 2016). A majority of community and regional banks will probably renew their push to be exempted from the new rules by claiming that they do not pose the same challenges as big Wall Street banks.
Regarding cash, many investors became positive with the fact that Trump's victory will not impact their cash holdings. In an interview carried out by Merrill Lynch from the bank of America, 59% of investors were confident that the president elect will not have any negative effect on their cash holdings; 21% will reduce cash and 20% will raise cash (Cunningham, 2016). According to the investors, the election will not be a game changer for rates and EPS. For this reason, the moves of the stock market in the last thirty six hours after Trump won the election were tactical and not fundamental in nature. The fact that many investors were unconcerned about Trump's victory on their cash holdings implies that they could invest more in the stock market (Cunningham, 2016). This was a significant move as it helped to surge Dow Jones to an all-time high.
Many traders piled into healthcare and financial stocks, sectors that were seen as likely to struggle under the Clinton's administration (Tribune news services, 2016). Many healthcare companies climbed 3.4%. The sector had previously suffered a beating, which reflected fears that a Clinton's presidency would curb drug pricing and hurt drug makers together with the biotechnology companies (Tribune news services, 2016). In conclusion, after Trump Clinched power, investors became confident that his plans for infrastructure spending, tax cuts and lighter regulation will significantly benefit the U.S economy. Banks and other financial stocks usually benefit from higher interest rates as well as less government regulation. All these factors motivated investors to invest more on stocks.
Cunningham, T. (2016, 11 10). Dow Jones hits record high as Trump rally continues but bond yields surge on inflation fears . Retrieved 12 13, 2016, from The Telegraph: http://www.telegraph.co.uk/business/2016/11/10/chinese-stocks-climb-to-10-month-high-as-trump-fears-recede---ma/
Farrell, S., & Wearden, G. (2016, 11 10). Why has Dow Jones hit a record high following Trump's victory. Retrieved 12 13, 2016, from The Guardian: https://www.theguardian.com/business/2016/nov/10/why-has-dow-jones-hit-a-record-high-following-trumps-victory
Heath, T. (2016, 11 12). How a Trump Presidency will affect 15 industries. Retrieved 12 13, 2016, from The Washington Post: https://www.washingtonpost.com/business/mr-business-goes-to-washington-now-what/2016/11/12/8c7f7846-a6e2-11e6-ba59-a7d93165c6d4_story.html'utm_term=.8ad165fcfb6b
Imbert, F. (2016, 11 11). Dow posts best week since 2011 after Donald Trump election win. Retrieved 11 12, 2016, from CNBC: http://www.cnbc.com/2016/11/11/us-markets.html
Sorkin, A. R. (2016, 10 31). What happens to the markets if Donald Trump wins' Retrieved 12 13, 2016, from New York Times: http://www.nytimes.com/2016/11/01/business/dealbook/what-happens-to-the-markets-if-donald-trump-wins.html
Tribune news services. (2016, 12 14). U.S. stocks surge following Trump victory; bond prices tumble . Retrieved 12 14, 2016, from Chicago Tribune: http://www.chicagotribune.com/business/ct-stocks-trump-victory-20161109-story.html