Prior to the election, most experts and economists on Wall St. felt that a Clinton victory would be more favorable (than a Trump victory) to the Market. This can be attributed to the fact that the Market hates uncertainty and it was thought that Clinton’s proposed policies were more predictable than those of Trump. In particular, The Market worried that Trump’s negative comments relating to international trade agreements (such as NAFTA etc) and China’s alleged currency manipulation could trigger harmful trade wars. As a result, it became clear that Trump was likely to win on election night, the DOW futures indicated a very significant fall of around 900 points that night. However, the Market fears eased after Trump’s very gracious acceptance speech around 3 am in the morning.
Therefore, although the market opened down, by midday investors began to embrace the idea of a Trump presidency. GDP growth has been very slow over the last several years and having reviewed Trump’s economic proposals, economists started to like the prospect of improved economic growth. Also, several important sectors have been rallying, including financial/bank and energy stocks because investors are betting that onerous regulations will be eradicated or significantly reduced. For example, it is very likely that a new Trump administration will dismantle Dodd-Frank Bank regulations, which should boost the bank sector’s profitability. Similarly, healthcare and biotech stocks are rallying and are likely to continue to do so. This sector had fallen quite dramatically in the weeks before the election because Clinton had warned that she would not allow increases in drug prices. This concern has now eased and Trump has vowed to repeal and replace Obama’s healthcare law, which may also be good for the sector. The prospects of defense stocks have also improved as Trump promises to update our military capability.
Other sectors may not do quite so well. Stocks like Google, Apple etc in the tech sector are under some pressure due to the possibility of tariff wars with China etc. The Market believes that Trump’s victory, together with his party’s control over both houses of Congress, will trigger an era of increased spending on infrastructure, unprecedented tax cuts, and protectionist trade policies, all of which will lead to increased inflation. And because fixed income returns are relatively modest, bonds suffer more than stocks when inflation rises. Currently, the economy is close to what economists term the “full employment” phase. A big increase in fiscal spending to rebuild roads, bridges, and airports etc combined with deficit-spending in the form of a tax cut, may lead to more money flushing around leading to inflation. So, the yield on the 10 year Treasury moved up over last few days and rates are likely to continue to move up. Long-term, rising rates could hurt the U.S. housing market and likely reduce corporate stock-buyback programs. Buybacks helped boost share prices in recent years and were often funded with borrowed money. Therefore, although Trump’s policies could stimulate the economy in the near term, the long-term is less predictable given a potentially “unacceptable” level of debt to GDP.