Mike and I have had so many questions about the post-election stock market run-up aka, “The Trump Bump,” that we thought we should address it in our December newsletter.
First of all, we and many others were surprised by the election results and the markets’ reaction. Remember the last week of October when the market corrected in response to the FBI announcement they were reopening the Clinton investigation; and markets subsequent advance when the FBI later said “Never Mind”? Thus, it appeared the market would react favorably to a Clinton Presidency. Election night results really shook investors when at midnight, as the Trump win became obvious, the Dow Jones Index dropped more than 800 points. But a funny thing happened on the way to a major correction – all the security indices then began to advance and have not stopped for the last five weeks.
- Some of the experts we have heard or read explain the surge as the result of many factors, not just one:
- The pre-election environment for stocks was uncertain – and markets do not like uncertainty.
- The pre-election rhetoric from both candidates was frankly depressing.
- Money gathered on the sidelines, awaiting clarification.
- The Trump platform of less regulation, more infrastructure development and reduced income taxes has encouraged investors.
So the investors’ renewed demand has driven up the value of the industries that will benefit from less regulation (think banks and energy), more infrastructure development (think equipment manufacturers) and lower taxes (think technology). That is not to say all sectors gained – utilities, fixed income bonds, and high dividend payers experienced corrections as investors liquidated these holdings to reallocate to the advancing sectors.
Now where do we go from here? Well that is the $64,000 question as we Baby Boomers like to say. On one hand, it is possible the markets will continue to advance if the Trump promises actually become legislation and promises are kept. On the other hand, if Congress does not go along, and continued gridlock becomes apparent, there could be a future correction. The markets quick run-up has all been based on rhetoric and expectations – if expectations are not met investors will then question the value of these appreciated stocks.
What we are doing is holding to our primary philosophy of diversification and allocation with a longterm perspective. As 2017 progresses we can see which sectors will actually be the long-term beneficiaries of the current “Trump Bump”.
Mike and I wish all of you a Merry Christmas and a prosperous New Year.
Jack and Mike