Conventional wisdom said Hillary Clinton was going to win the election. Conventional wisdom said that a Hillary win would be better for the market because nothing would change. Conventional wisdom said a Donald Trump victory would be bad for the markets because it would increase uncertainty.
But there is no such thing as conventional wisdom.
The very second markets got an inkling that Trump might win on Tuesday night markets across the globe sold off violently. The Dow Jones Index futures were down a whopping 800 points and some international indexes were down by an even higher percentage.
Then something happened.
The Dow got all the way back to even by the open on Wednesday morning and closed up over 200 points for the day. And then it went up almost 200 the next day. In fact, the index has rallied about 1,500 points from the futures market lows on Tuesday night. It’s starting to look like a market that wants to go a lot higher.
Of course, this is only a couple of days. And the move can be partially explained by the Brexit experience in June. The markets plunged in the days after the Brexit vote and sprang right back just as fast as they fell. Investors, sensing déjà vu, bought stocks amidst the panic in the overnight market. There is also the possibility that the uncertainty posed by a Trump presidency is offset by the uncertainty resolved by the election.
But there’s something else.
I think investors were so convinced by the establishment media narrative that Trump would never win that they really didn’t give the possibility much thought. Now that investors are analyzing what a Trump presidency could really mean for stocks they like what they see.
President-elect Trump said he wants to lower taxes across the board, lower the corporate tax rate, lure back trillions of dollars in corporate money held overseas, massively reduce the regulatory burden on businesses, repeal Obamacare and enact a huge infrastructure rebuilding. These things would likely be fantastic for economic growth and the market. And, with both houses of Congress controlled by his own party, he can probably get a lot of these things done.
There is some worry however that his tough stance on trade will lead to tariffs and possibly trade wars which would be bad for the market. But there is also a chance that Trump is successful in renegotiating and improves the trade agreements. But, most have underestimated Mr. Trump for a year and a half now. It might be time to take the other side of the bet.
Trump’s agenda can also accomplish a couple of other things that are more under the radar.
First, it can change the sour narrative that has existed since the recession. This recovery has been one in which expectations were that of a slow growth “new normal” economy for now, and likely disaster down the road. The pessimistic mentality is largely responsible for the lack of business investment and enthusiasm for the market.
The second thing this agenda should accomplish is to get the Fed out of the market. In the absence of fiscal reforms to foster strong and sustainable economic growth, the Fed has had to do all the heavy lifting. By keeping interest rates near zero for eight years and pumping trillions of dollars into the banking system the central bank has propped up the market artificially. Stocks have moved higher simply because money has no place else to go to earn a decent return.
At this point, the Fed is quickly losing juice and can’t hold up the market much longer. But here come those long-lacking fiscal reforms. Now the market can go higher the old fashioned way, with a strong economy and rising corporate earnings.
Last time an ambitious pro-growth agenda of lower taxes and reduced regulations was enacted was during the Reagan administration. The policies unleashed the greatest bull market in history. In the next 15 years the Dow Jones soared from under 1,000 to over 10,000.
That said, let’s not pop the champagne corks just yet. There are still a lot of problems out there. The global economy still stinks, the Middle East is a mess, we have $20 trillion in debt and the country is divided.
These problems won’t go away overnight. And it still remains to be seen if President Trump will be able to actually get these policies through Congress.
There’s an old saying on Wall Street: no one ever knows in which direction the next 10% move in the market will be, but the next 100% move can only be higher. The saying is true in any era. But now, that 100% move higher might be a lot sooner than anybody imaged possible a week ago.
Tom Hutchinson is a Wall Street veteran with extensive investing and finance experience.
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