Before the election, prominent stock pickers warned that the Dow Jones Industrial Average would plunge 1,000 points if Donald Trump were elected president.
A Dartmouth economics professor predicted that a Trump win would trigger an 8 to 10 point sell-off in the Dow. An MIT economist’s prediction was even more dire: a Trump win would “likely cause the stock market to crash and plunge the world into recession.”
The exact opposite has occurred.
The Dow closed up nearly 300 points on Wednesday at 19,549.62–less than 500 points from the 20,000 milestone. Moreover, the Dow is up over 1,200 points in the four weeks since Trump was elected–nearly 7 percent.
So why the so-called “Trump bump,” vs. the dire predictions of those who were so wrong?Image Credit: Timothy A. Clary/Getty Images
Given that the equity markets are often driven by emotion and anticipation of things to come–good or bad–it appears that both institutional and individual investors believe a Trump presidency will be good for the economy, as Fortune sees it.
A rising tide lifts all boats. But in the stock market, that can be a bad thing. When all stocks start rising for no reason, you have to wonder whether Mr. Market is getting a little giddy. That’s not the case right now.
The stocks that are rising the most seem to be ones that will benefit from Trump’s policies. The President-elect has talked about a number of economic measures, but they all convey the same thing: boosting the amount of money in consumers’ pockets, mostly through tax cuts.
Trump’s economic policies, in particular his talk of spending on government projects like infrastructure, seem bound to cause inflation, one of the biggest economic boogeymen.
sBut despite investors’ long-held fears, inflation is a pretty good place to be. […] Stocks are based on the long-term value of a company’s earnings, and higher inflation means those long-term earnings will be worth less down the road. But next to bonds, stocks are by far the winners of inflation.
What’s more, interest rates are likely to rise with inflation. Bank stocks, which would benefit the most from higher lending rates, have been among the best performers in the Trump bump.
While recognizing the current euphoria, MarketWatch warns against “jumping wholeheartedly, or blindly, into the market.”
Whether the advance for equities can sustain itself over the next month and into 2017 is anyone’s guess, but for now investors who have been reluctant to embrace the unabashed exuberance that has gripped stock investors over the past month are losing money—fast.
And “anyone’s guess” is spot on.Image Credit: Andrew Burton/Getty Images
As experienced investors are well aware, two old axioms are generally applicable: what goes up must come down–and, don’t put all your eggs in one basket.
For now, the Trump rally is alive and well.