Many of you may have wondered why did I go radio silent for such a long time. Well, the truth is there was very little going on besides the elections; and, since I promised I wouldn’t be writing political blogs… I had to recuse myself.
But it is all over, another “surprise” election victory that “no one saw coming”, where “the polls failed miserably”… I am noticing a pattern here. Anyway, let’s not dwell on why everybody was wrong, or how did Trump pull the rabbit out of the hat, let’s focus on what the markets are doing.
At around 4am GMT Dow futures had tanked some 800 points, mostly trading in Tokyo, Hong Kong and Sydney. But as news of a Trump victory began to come in the tide turned, and turned fast. Futures recovered 300 points in no time, and by the time London opened they were trading only 280 down. Fast forward to the market open in NY, and the Dow opened flat, closing at a new record high.
What is driving the markets? Why the sudden change of heart? There are points that need to be considered in order to answer this. First of all, the markets have done great during the past 8 years, not as a direct consequence of any Obama laws, or directly influenced by the Democrat government, but because of a relentless money printing machine and near zero interest rates. So the idea that a Clinton victory would extend the current situation a further 4 years was something the markets were very happy about.
But the truth is the markets love a Republican government, markets always tick up whenever a new republican president is elected, and tend to do that even more when the president is accompanied by both houses.
As expected, there were gainers and losers and the stock were closely clustered around his policies (or expected policies). Repeal Dodd-Frank resulted in soaring banking stocks; rebuild America’s infrastructure drove Caterpillar (NYSE:CAT) to become this year’s Dow’s best performer; revamping the military gave way to defense stocks like Raytheon (NYSE:RTN) reaching all-time highs. On the other hand the idea that Mr. Trump might cut green subsidies drove many solar power stocks on a nosedive.
So far these are all market assumptions based on what little policy announcements it has received so far. We need to wait and see what will actually happen in January, but unless there is a serious rate hike in December, we are looking at a very sustainable Santa’s rally.