Why the markets seem to have embraced Trumponomics

Just before the U.S. election, analyst and portfolio manager Jason Castelli thought that if Donald Trump won, there would be an initial, knee-jerk reaction causing a market sell-off, followed by stabilization over the next several days.

"What I thought was going to happen over a couple of days or a week or two weeks, happened in a matter of hours," he said. "It was quite astonishing."

Global markets initially tumbled following the U.S. election results last month, but had rallied by the next morning, finishing at a near all-time high. And since then, Wall Street seems to have welcomed a Trump presidency, as the markets continue to climb in North America.

Markets did take a hit on Wednesday after investors were surprised that the U.S. Federal Reserve projected three more rate increases for 2017 — the Dow Jones industrial average fell 118.68 points.

But the Dow Jones, which opened election day at 18,251.38, still closed Wednesday at 19,792.53, and continues to creep closer to a 20,000 milestone.

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"So it's been a massive, massive rally, and I think there have been a few factors that have driven this," said Colin Cieszynski, chief market strategist at CMC Markets.

Many investors, including those who for at least a few hours during election night had deep concerns about a Trump victory, have come around in the following weeks, and now see a future administration that is pro-business and market friendly.

Trump's promises during the campaign to cut corporate tax rates and regulatory bureaucracy and spend money on infrastructure were seen as positive moves in the eyes of investors. As well, Trump has proposed incentives for corporate America to bring home more of its cash held abroad — a one-time 10 per cent tax on repatriated cash. And much of that could end up in the markets.

"When that cash does come back to the U.S., most likely corporate America will use that to buy back shares and increase dividends," Castelli said.

But Trump's anti-trade rhetoric and threats to rip up NAFTA also raised significant questions. Post-election, however, Trump seems to be focusing more on cutting taxes than gutting trade deals. 

Real priorities surface

"I think people are learning more about what Trump's real priorities are and they're …more business friendly than you would have thought based on the campaign," said Eric Zitzewitz an economics professor at Dartmouth College.

"Since the election, we've heard a lot about traditionally Republican conservative [policies] ... and nothing about NAFTA."

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In another boon for investor confidence, Trump has been choosing top business executives to fill his cabinet.

"They are obviously going to be putting forward policies that are pro-business, less regulations," Castelli said.

"[Investors] realize that Trump is a businessman and a lot of the people he's appointing are business people, and they obviously would not want to do something negative that would impact the economy and hence their businesses."

However, Cieszynski said the rally is not all a Trump phenomenon. Partly it has resulted from the return of investors who had kept cash on the sidelines while they worried about the outcome of the election.

"There's been a lot of worry hanging over the market this year," he said. "First it was Brexit, then China, then the U.S. election.

"Once the election was over, it unleashed a lot of pent-up demand … with capital just flowing back into the markets."

Castelli agreed that the environment was ripe for a market rally, with lots of cash on the sidelines and underlying trends that were positive for the equity markets.

"Then you look at the policies that Trump is proposing and they're pro-growth," he said.

Market correction possible

The continuity provided by a Hillary Clinton win also would have meant market growth, but not likely to the same extent, Cieszynski said.

At some point the markets are likely to level off, and there could be a correction, he said. Investors with high expectations of a Trump administration could begin to cool once many of the proposals they favour drag through the laborious Congressional processes.

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"It's going to take a while for all that to get implemented," Cieszynski said. "By the time it goes through the budget process and things get approved and money gets allocated, that could be a year or so from now.

"At some point you end up with this disconnect. I call it the 'hammock effect.' Where you're kind of stuck in this sagging middle. So at some point that will hit, but it's hard to say when. Right now people are pretty euphoric."

Meanwhile, Zitzewitz observed that this market rally has been somewhat confined to North America. Other stock markets are below their peaks. In particular, emerging markets — those in Latin America and East Asia that are dependent on trade — are down.

"It's worth tempering a little bit when we talk about how stocks have done," he said.​