On Tuesday November 9th 2016 the world was in collective disbelief as Donald Trump snapped up the last of the Electoral College votes needed to secure the US Presidential nomination.
Trumps victory was widely regarded as a very low probability event even in the days leading up to the election. You would be excused for thinking that in 2016; you had unwittingly stumbled into an alternate universe where all of all of things that shouldn’t happen, did. This is how bad it was:
On the 7th of November, Huffington Post pollsters concluded that Hillary Clinton had a 98.2% chance of winning the election, reporting that Trump had “essentially no path to an Electoral College victory.”
On the 8th of November, the New York Times gave Hillary an 85% chance.
I’ve scoured the internet for polls and have found that none that indicated a Trump victory was likely. Yet here we are. Major news events can often have dramatic effects on global markers, so just how did the stock markets play out?
Before we answer that question, let’s understand why markets move in events like this.
Why do Government Changes Move Markets?
The simplest way to picture this is to think about what underpins the price of a stock at any given movement. The simple answer is that the price is based on expected future earnings of the stock. When investors buy and sell stocks, they are constantly evaluating impacts on the anticipated earnings and factoring these into the stock price. When you have an active market of many buyers and sellers, the stock reflects the hive-mind of investors. Stock price movements are essentially a change in the markets opinion of what the stocks future earnings will be.
Global events such as the US presidency have the power to move entire markets. This Is because the Government has the ability to set policies which can have a sweeping influence over the future expected earnings of the entire worlds stocks.
An example is the manipulation of tax rates. If the government implements a policy of lower corporate tax rates it’s likely that the general stock market conditions will improve, this is because the expected future earnings will increase. In reality, policies are a lot more complex and can impact different industries in different ways, but the overall market sentiment towards policy will always be reflected in stock prices.
What Happened to The Stock Market after the Trump Victory?
The short answer is almost nothing, particularly when compared with previous election-day results.
While many media outlets and analysts predicted a stock market sell-off if Trump won, in reality the S&P500 actually increased by 1.1%, the DOW 30 was up 2.81% and the NASDAQ Composite was up by 0.84% by the time markets closed the day after election.
Just as the media was demonstrably wrong about the results of the election, they were also wrong about the Armageddon-like stock market sell off that would occur. Donald Trump’s election instead recorded the 5th highest stock market movement the day after an election in US history.
How does this stack up against previous Election Day trading results? Here are the top 5 biggest stock market losses on the day following a US election:
|Election Winner||Election Day||% change day after Election Day|
|Barack Obama (D)||
Harry S. Truman (D)
Franklin D. Roosevelt (D)
Franklin D. Roosevelt (D)
Barack Obama (D)
It was actually Barack Obama in 2008 that had the most negative impact on stock markets immediately following an election.
We shouldn’t place too much faith in post-election day movements however. Bloomberg did some analysis recently which shows that the movement following an election day predicts the following 12 month movement less than half the time.
What Can We Expect From the Market in the Months Following Trumps Inauguration?
The sentiment and discourse I’m seeing in the media at the moment suggests that there is a general idea to sell the inauguration– basically indicating that stocks will fall off when Obama takes the oath on the 20th.
This idea stems from two main factors:
- The Stock Market has rallied since Election Day. It’s currently up by 6.6% which is the highest election day to inauguration rally since 1996. A lot of people think that this means that the S&P500 is overpriced and an inauguration sell-off is inevitable.
- The other factor is history which has shown that the S&P is typically weakened after Republican inaugurations on average a -1.4% movement over 3 months
Here’s the thing about these two sentiments, they’re not substantiated on anything but history. Let’s go back to the fundamentals of market movements remembering that governments have the power to enact policy which can move the market by changing the expected future earnings of the market.
Trade is always a hot topic when it comes to the economy. Trade is good, it has undoubtedly increased the standard of living globally, however there is always an ever-present “us vs them” mentality. Sometimes international trade can come at the expense of domestic trade, particularly when low-wage economies such as China can produce goods at a far lower cost than their American competitors
Trump has been very clear in his line against China- he wants to label them as currency manipulators (artificially keeping the Chinese dollar low to make their exports more attractive). Trump has also expressed many times his intention to bring overseas factories and jobs back to US soil. He’s also pledged to put the brakes on the controversial TPA trade agreement.
What impact do these policies have on expected future earnings? Well first and foremost, taking foreign competitors out of the market sends a strong positive signal to US companies- less competitors means more profit. Bringing back factories and jobs on the other hand will likely mean it will cost US companies more to produce goods- this will of course eat into future earnings. However, companies are exporting factories and jobs in many circumstances because they have to. If your competitors are exporting jobs and producing goods at a lower cost, what choice do you have if you want to stay in business? On the flip side, more jobs in the US means more money in the economy available to purchase goods and services.
Overall: It’s hard to argue that these policies would have anything but a positive impact on future expected earnings for US companies and therefore stock markets.
It’s no secret that Trump wants to lower the corporate tax rate. The Trump plan is to “lower the business tax rate from 35% to 15%”.
This one is quite straightforward; it’s quite obvious that lowering the business tax rate will have nothing but a positive impact on the expected future earnings.
Trump claims that “For each 1% in added GDP growth, the economy adds 1.2 million jobs “. Trumps plan is to add 25 million jobs and his policy hinges on GDP growth as being the mechanism to deliver this.
GDP in a nutshell is the sum of the value of a countries overall production of finished goods. Clearly stimulating this is a big tick for corporate profitability. Note that this doesn’t necessarily mean a company will produce more- it can also mean that the price (and profits) of goods and services will increase. Again this represents a positive signal to the expected future earnings of US companies.
So What do the Fundamentals Say?
My analysis suggests that Trumps policies are favourable to big business and corporates. This doesn’t mean make them “good” policies- it simply means they’re good for big businesses. When you consider this, is it any wonder that stock markets have rallied since Trumps election victory?
The point I’m trying to make is this:
The media was resoundingly wrong about their assumptions about the election. They were wrong about Brexit and they were wrong about Trump.
Why were they wrong? They didn’t focus on the fundamentals. The cause and effect relationship between the policy and expected future earnings is by far the most important factor to consider when you’re trying to predict the movement in a stock market. It’s so easy to get caught up in media hype without realising that it’s not substantiated by anything. That isn’t to say that the media always gets it wrong, quite often they’re correct- particularly when enough people believe what they hear in the news to influence the market.
The take-home points though are this:
- Don’t believe the media at face value:
Media have an incentive to make money. More and more this is achieved through sensationalism and click bait rather than the fundamental analysis. The story that sells is going to be the story that prints.
- Do your own research
In any stock market situation, considering the fundamental market movers are critical. This is easier said than done of course. There are a thousand and one things simultaneously impacting a market and a lot of these things might be “invisible” to investors (i.e. not public information).
- If you’re going to trade news events, consider that the short term movement doesn’t always indicate the long term trend
This won’t be a big problem for day traders who move in and out of the market quickly, however beware of trading knee-jerk market movements. If the post-election market movements are anything to go by, they often misrepresent the direction of the market.
A small caveat this post is not about politics and I am in no way advocating for Trump. The economy is only one dimension of a government’s responsibility and policies advocating for corporate wealth can often be to the detriment of the poor and middle-class. I’m simply stating my view on the impact of Trump’s policies on stock prices and stressing the need to focus on fundamental analysis when drawing conclusions about market movements.