The Unexpected Trump Reaction

“I can say with 100% certainty that there is a really good chance we could see a huge, huge correction.” These were the words that billionaire Mark Cuban told CNN host Erin Burnet back on May 16, 2016, to describe what would happen to the stock market if Donald Trump won the election. Trump won, but the market didn’t experience a “huge, huge correction.” In fact, quite the opposite occurred.

Mr. Cuban surely was not alone in his call for a stock market correction—a decline in the stock market of 10% or more from a recent high—following a Trump victory. The argument for stock market volatility under President-elect Trump is that he is a Washington outsider with no political experience and has been accused of changing his position on certain topics. That creates policy uncertainty and policy uncertainty creates market volatility.

Yet, in his election night victory speech, Mr. Trump softened his tone, complimented Hillary Clinton on being a tough competitor and called for unity. Investor’s quickly got the sense that Campaign Trump might not be the same as President Trump and investors started to focus on his policies. When it comes to his policies, many of them are pro-business and U.S. stocks started to rally following the election.

Consider President-elect Trump’s desire to reduce corporate taxes, repatriate overseas corporate cash and spend money on infrastructure. Broadly speaking, all three of these polices are good for businesses. They allow companies to keep more of their earnings and, in the case of infrastructure stimulus, gives some companies additional revenue and projects.

In another business friendly move, President-elect Trump would like the regulatory pendulum to change direction. Washington regulation has a history of swinging between higher regulatory and lower regulatory environments. Following the Great Recession, the regulatory pendulum swung quickly toward higher regulation. Businesses had to deal with the costly, and wide spanning regulations of Dodd-Frank and Obamacare. President-elect Trump has stated his desire to eliminate or soften both of these laws. This will start the pendulum swinging back toward less regulation, and businesses tend to prefer these types of environments.

In another unexpected move, interest rates jumped higher. On the Monday before the election, the interest rate on the 10-year U.S. Treasury was 1.83%. By the end of the week, it advanced to 2.15%. Investors immediately started to react to the potential impact that President Trump’s policies may have on inflation. The rationale is that infrastructure spending, lower taxes and faster economic growth would cause both inflation to increase faster than previously thought and potentially increase in the national deficit.

With a litany of potential business friendly policies forthcoming, it seems to make sense that stocks would actually rally like they did. However, we want to stress, that while this may be the start of an acceleration in our economic growth, it won’t come in a straight line. There will surely be bouts of volatility as the globe adapts to the policies and uncertainty that debating these polices may bring. Diversification remains a prudent way to manage these risks while participating in the potential upside.

The views and opinions contained herein are those of Bellatore Financial, Inc. and have been researched and analyzed by Jonathan Scheid, CFA, President & Chief Investment Officer.
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