Shedding previous pessimism, a rising number of investors and analysts now say that Trump's major initiatives on infrastructure spending, tax cuts and deregulation will fuel the stock market toward more gains. We'll look at why, and also temper it with a look at pitfalls and skepticism that may result from rampant deregulation and protectionist trade policies. (For more, see also: Donald Trump's Economic Policies.)
U.S. equities have risen only about one out of every three times since 1928 on the day following a presidential election according to Marketwatch, with the S&P 500 index averaging -0.14% returns on the days after.
Trump's Pro-Growth Proposals
Some of Trump's economic agenda could be a boon for American businesses and consumers. Tax cuts across the board could mean more money in the pockets of families to spend, and for businesses to invest. With Republicans in control of the house and senate, these measures are more likely to pass. Although the wealthy are most likely to benefit from these measures, the hope is that there will be enough stimulus for everybody to see both job and spending growth from these tax cuts. (For more, see: Do Tax Cuts Stimulate The Economy?)
Trump also plans massive infrastructure spending projects to fix America's outdated and crumbling roads, airports, utility lines and more. Of course, Trump also wants to build a wall on the southern border with Mexico. These efforts are likely to spur jobs and corporate investment in order to ramp up to readiness to get these projects started.
Trump has also campaigned on deregulation, including the dismantling of Dodd-Frank and other restrictions that were put into place following the financial crisis of 2008. While some fear that this will simply set up the next financial crisis, in the short-term it is positive for stocks and the financial sector in general. (For more, see: Trump Vows to 'Dismantle' Dodd-Frank.)
Of course some of his other plans, being anti-trade and protectionist may come back to haunt this rally if they pan out.
How Trump Is Making Strategists Look Smart
Many pollsters got the election result wrong and many Wall Street analysts were wrong in calling a stock market crash in the days following the result (even though futures did fall by 3 – 4% overnight when the news was announced, they rapidly recovered by the opening bell on Wednesday). Market strategists that had called for a bull market through 2016 and into 2017 may end up looking quite prescient. If the rally continues, Wall Street’s perennially optimistic strategists could underestimate the market this year.
Market strategists have woefully underperformed over the past few years, calling for returns in excess of the 4% (before dividends) average that the S&P 500 has yielded for investors recently. The median S&P 500 year-end forecast among 19 equity strategists is 2175, with targets ranging from 2000 to 2300. The Trump rally put the index right at 2175 on Thursday afternoon. (For related reading, see: How Will Trump's Policies on China Impact U.S. Business?)
The Bottom Line
Trump's win was unexpected, but his economic policies just might carry a rally through the end of the year, a situation where analysts expectations may actually underperform realized returns. Tax cuts, infrastructure projects and deregulation are all seen as a boon to the economy, and the stock market has registered as such.