The night of the US presidential election many leftist commentators (and some on the right, as well) enjoyed pointing out that Standard & Poor futures were going down as it looked like Trump was going to be the next President of the United States. Most of them did not say it directly, but they were certainly alluding to the stock market not having faith in Trump. The following day came the painful realization that they were wrong. The markets rallied to new highs, and records were broken. Does this mean that the markets actually like and support hopefulness in a Trump administration? Does it mean that investors have overflowing confidence in Trump to create a great economy? Hardly.
In the short term, underlying performance of corporations is not known. Corporations report on their operations quarterly, and trends take even longer to quantify. In between that information, investors are reacting emotionally based upon whispers, guesses, and estimations. You can probably expect to see at least a small correction in the coming weeks as the markets fall back into a sort of idle place until more policy is announced.
This rally would have occurred with the success of any candidate, but to a lesser extent for Johnson if he had won (only because investors would be less familiar with Johnson).
The reason that S&P futures declined the night of the election is that the markets don’t like surprises, and Trump was a surprise. What really drives volatility in the markets is a lack of information, or an unknown or unquantified surprise. Unknowns are more frightening to investors than positive or negative information. The stock markets often react well once an unknown is resolved, and that’s what happened in this case. We were surprised by the outcome on election night, but we had solid information of who had won the following day. There was a known quantity, and so the markets moved upward the day following the election. Not because there was hope in a Trump presidency (though that plays a role, to an extent), but more so because the markets now know who the President will be. They have information that has been settled.
Will Trump’s policies have a positive impact on stocks prices in the future? Too hard to tell. It’s possible, but the information has to come first. If the information is what the market expects, the market will probably react in a positive manner. If the information is a surprise, it will probably react poorly. Over the longer term, we will see how the policies actually affect things and the impact they will have, offering needed information that impacts stock prices, either positively or negatively.
Political commentators got it wrong more than once on the election. They seem to have guessed the outcome wrong, and they got it completely wrong on how and why the stock markets were reacting the way that they were. The markets were reacting more on anticipation, then surprise, then knowing. There would have been a rally, no matter who won the election. It would be better if media commentators would give themselves a little more literacy on topics they want to discuss. In past experience in previous elections, this quarter will show very good financial results for corporations, because people now know who will be president and will now begin to turn loose of some of their money. That would have been the case for this quarter regardless of the election’s outcome.
Danny Chabino
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