Against the odds and what most analysts predicted, President-Elect Trump pulled off a convincing victory in the Electoral College where he may reach 300 votes. He outperformed and won in some states which were thought to be blue: Pennsylvania, Wisconsin, and likely Michigan. He won the swing states he needed to win: Florida, North Carolina, and Ohio. This was largely because white working class Americans turned out as America’s manufacturing base has been hollowed. I had described reasons why this wave election would occur when showing the weakening economy. Even though most analysts said Trump had no chance, I said in my last post that the election was too close to call based on the polling when looking the margin of error.
While the election didn’t surprise me at all, the market’s reaction has been shocking to me. I was wrong on many accounts on my expectations for what a Trump victory would bring. While I have been proved wrong in this initial market reaction, the first day’s reaction does not necessarily predict much about what will happen in the next few years.
The market initially sold off hard on the news Donald Trump would win. The pre-markets had the Dow down over 700 points at one time. However, it rebounded and when the market opened it was only down slightly. Then, in the morning, the market began to rally with it currently up over 1%. There are many factors at play which has caused this change. One important aspect is that the GOP won the House, the Senate, and Presidency. This provides a clear path for an agenda to get passed. Wall Street is hoping that agenda includes cutting taxes, repealing regulations, and passing a fiscal stimulus. Another reason why the market rallied is because the result is not in question. Hillary accepting defeat lowers the uncertainty about how the transition of power will take place.
A big reason for the rally is Trump’s acceptance speech which was gracious to Hillary and promoted unity. It’s tough to determine how much to read into the speech. Trump is still an uncertain politician which means the most recent thing he has said may contradict previous statements. Wall Street decided to believe his statements on big infrastructure spending in this speech even though he promised to cut the debt. I recognize that the economy needs growth to get out of the massive debt hole it is in, but the growth it needs is from the private sector, not the public sector. An infrastructure spending plan will increase the debt, so it does contradict his previous statements on the debt.
The market’s rally is mainly a function of individual sectors rising opposed to a broad based rally. The best sectors are industrials, financials, and health care.
With healthcare, the reason the market is rallying is about what is not going to happen more than what is going to happen. Hillary was seen as a buster of certain drug companies. The trend was for Hillary and Bernie Sanders to find individual drugs which have had no changes and big price increases and excoriate the company who provided the drug. This hurt the company’s stock who made the drug and also hurt the overall sector because investors didn’t know which company would be in the crosshairs of the government next. This practice had the goal of scoring political points. The system needs to be fixed instead of blaming drug firms’ greed for the problem, when greed has nothing to do with the problem. Greed is never the problem; problems are caused by infringements on free markets by the government. With Hillary not becoming president, the IBB Biotech ETF is up 9%.
Industrials are rallying today because, if you listen to Trump’s speech, the main policy that he spoke about was a massive infrastructure spending program to put Americans back to work. Caterpillar stock is up an unprecedented 8% on the day. This infrastructure program getting done will be dependent on what the Congress does. Ordinarily Republicans oppose big increases in spending. The entire reason why the GOP won with Tea Party momentum is because the spending needed to be cut. Presidential candidates Rand Paul and Marco Rubio talked about entitlement reform in their campaigns. They both won re-election in the Senate. Will the Republicans grant Trump a blank check when they tried to stop every single one of President Obama’s measures? That would be hypocritical, but considering the GOP won because of Trump, it is certainly possible if not likely.
Trump’s big spending program is increasing inflation expectations which means more rate hikes are coming. The spending program is also expected to grow GDP. These are the two reasons financial stocks are rallying heavily. Morgan Stanley stock is up almost 8%. This rally is equally as impressive as the rally in the IBB and Caterpillar. I do think inflation can pick up, but I don’t think financials should be rallying. If the Fed lets off the gas pedal with ZIRP and a $4.5 trillion balance sheet, the stock market bubble will crash regardless of what fiscal stimulus is put in place. The problem investors have is they don’t recognize the Federal Reserve and the Congress cannot grow the economy. Only the private sector can grow jobs. While the government looks ready to release firepower today, the private sector is still weak. The weakness retailers will see this holiday season is caused by the American consumer being ‘tapped out’ not because they were too focused on the election to eat out and buy goods.
Conclusion
I expected Trump to win the election because the economy is weak. However, the rally after he won is unexpected. The market only sees the positives and ignores the possible trade wars he could create. The market and the American people are ignoring his problems and remaining optimistic. My thoughts are that Trump could be the best president ever and the economy is still about to be in a recession. If Trump won because the economy is weak, there is no way to avoid a correction in stocks. As usual, stocks don’t represent reality.