The market took investors on a roller coaster ride Tuesday night and leading into Wednesday’s trading. Before the election results were in, investors skittish about how close it was sent futures plummeting to around 750 points. But as the uncertainty evaporated with the election of Donald Trump, the market welcomed the stability on Wednesday with the Dow closing up more than 250 points – a gain of 1.40%.
Interestingly, the VIX – Wall Street’s favorite fear gauge – dropped 23% to 14.38 by market close. That tells us that investors have been busy rebalancing their portfolios. With Trump in office, investors are selling out of stock sectors like healthcare and buying into those that are expected to benefit from his policies like energy. Other assets saw a bigger change, like the Mexican peso, which fell 8% against the U.S. dollar.
But once the initial reaction is over, where will the market go? Will investors maintain this level of confidence going forward, or is this just a knee-jerk reaction to some quick sector rotation trading?
A New President Doesn't Mean a New Economy
Investors will be watching carefully over the next few months to see exactly how the President-elect will set the tone for his administration. Many investors are wary of some of Trump’s ideas, which could harm the U.S. economy. The first challenge is only a month away with the Fed rate hike suddenly in question.
The market had originally priced in an 82% chance of the Fed raising rates on Tuesday, but fell overnight to around 50%, before finally settling at 76%, according to the CME Group’s FedWatch tool. Like stocks, expectations of an increase tumbled fast before recovering, suggesting that despite what the VIX might read, there’s still uncertainty in the market.
Until Trump officially takes office, we can expect the market to resume its holding pattern until investors are confident of the direction the new administration will be heading. Financials have already begun to enjoy a bump, as many expect deregulation under a Trump administration.
Still, there are some risks in the market. Some of Trump’s policies could result in an international trade war, which would cause a rise in inflation and a drop in consumer spending. The yield on the 10-year Treasury climbed above 2% and it could keep going up with investors already preparing for a return of inflation. Assets like gold and silver could see a steady rise over the next six months as risk-averse investors flee to safety as well.
One thing investors should take away from this election, as with any other election, is that the President can’t actually affect change in the economy very quickly unless there are extraordinary circumstances (think back to the financial crisis in 2008 and the subsequent bailout and regulatory changes). The economy can be nudged at best by policy changes, but underlying fundamentals can’t be ignored. Investors hoping or fearing that Trump will take charge of the economy will be disappointed. Instead, investors should focus on the data like corporate earnings, inflation and GDP growth.