Fra New York Times:
To the long list of pundits who called the election all wrong — as well as its likely consequences — add Wall Street analysts.
As the presidential election approached, they were falling all over themselves to predict a Hillary Clinton victory and, afterward, a modest stock market rally. The prospect of a win by Donald J. Trump was so remote as to be deemed a “black swan,” an event that was only distantly possible but would have potentially dire consequences for financial markets.
Among the many predicting a drop in equity markets in the unlikely event of a Trump victory were analysts at Citibank, JPMorgan Chase and Morgan Stanley. Keith Parker, head of cross-asset strategy research at Barclays, forecast a drop of 11 to 13 percent in the Standard & Poor’s 500-stock index.
The hedge fund Bridgewater Associates went even further, warning clients that the Dow Jones industrial average would fall 2,000 points.
But then, not only did Mr. Trump win, but American stocks rose. The S.&P. 500, Dow Jones and Nasdaq all gained more than 1 percent on Wednesday. On Thursday, the Dow rose 1.2 percent, the Standard & Poor’s 500-stock index was up 0.2 percent, and the Nasdaq was down 0.8 percent.
With benefit of hindsight, what’s extraordinary is how few professional investors saw it coming. Mr. Trump was derided as the candidate of “uncertainty,” which markets typically abhor, and many of his stated policies are vague, incoherent or inconsistent. But there was nothing uncertain about his overall pro-growth, pro-business and America-first tendencies, now backed by the firepower of a Republican House and Senate.
He is, after all, a real estate developer.
“We see tremendous opportunity for economic growth,” said John Engler, a former governor of Michigan who is now president of the Business Roundtable, an influential group of chief executives that was often at odds with Mr. Trump during the campaign, especially over trade and immigration. Now that the results are in, though, Mr. Engler sees a silver lining. “The Republicans understand,” he said, “that they’re on the spot to produce results.”
Simon Lack, founder of SL Advisors, an investment advisory firm and operator of a mutual fund that focuses on energy, carried the theme further. “Trump’s win is unambiguously positive” for many sectors of the economy, “especially energy infrastructure,” he said.
The doomsayers also ignored a century of market reactions to presidential elections. “We’ve done extensive research that suggests presidential elections don’t affect markets,” said James Stack, president of InvesTech Research. “The reality is that the market is influenced to the greatest extent by economic factors and monetary policy.”
“In almost all technical and macro aspects, this is still a bull market,” Mr. Stack said, and Mr. Trump’s election does not change that.
Markets generally rally the day after a presidential election, said Jeffrey Hirsch, editor of the Stock Traders Almanac, because elections, whatever their outcome, eliminate a measure of uncertainty. “It doesn’t matter if it’s a Republican or Democrat,” he said. Returns tend to be higher when an incumbent president is replaced or the party in power changes, as happened this week. And previous instances of the election of both a Republican president and Republican Congress have been followed, on average, by a first-year performance of 14 percent.
There are more specific reasons as well that investors applauded Mr. Trump’s victory:
INFRASTRUCTURE SPENDING During the campaign, Mr. Trump said he wanted to “build the next generation of roads, bridges, railways, tunnels, seaports and airports.” If he can get his Republican Congress to go along, that could easily surpass the President Obama’s stimulus plan in the depths of the recession. Mr. Trump has not put a price tag on his proposals, but suggested it could easily top $500 billion.
Economists generally agree that government spending can act as a broad economic stimulus as well as a boon for construction companies. The Congressional Budget Office estimated that Mr. Obama’s stimulus plan saved 2.1 million jobs in the last quarter of 2009, bolstering the economy by up to 3.5 percent and lowering the unemployment rate by as much as 2.1 percent.
Construction company stocks rallied on Wednesday. Shares in Caterpillar, which makes the heavy equipment used in most infrastructure construction, jumped more than 8 percent.
TAX CUTS With Republicans in charge, the kind of sweeping tax overhaul and tax cuts long sought by investors seem likely. In many instances, Mr. Trump’s proposed tax cuts go even further than those advanced by House Republicans. He wants to cut the top rate on individuals to 33 percent and cut the corporate rate and taxes on so-called pass-through entities like limited liability companies and partnerships to 15 percent.
Whatever their ultimate effect on deficits and interest rates — not to mention worsening income inequality — tax cuts are another form of economic stimulus.
“Tax modernization is our top priority,” said Mr. Engler of the Business Roundtable, arguing that it would substantially lift the economy a full percentage point beyond the growth rate of roughly 2 percent a year that it has been stuck in. “We’ve said that if you want to grow gross domestic product by 1 percent, get tax legislation done. The House Republican plan is a great blueprint. One percent growth over 10 years would be $3 trillion.”
DEREGULATION Investors and business leaders this week were cheering the likely rollback of a host of time-consuming and costly regulatory measures: crucial parts of the Dodd-Frank financial reform legislation, the Consumer Financial Protection Bureau, environmental regulations and labor protections. “Dodd-Frank has made it impossible for bankers to function,” Mr. Trump said during the campaign.
Needless to say, Elizabeth Warren, the Massachusetts senator and Wall Street nemesis who Mr. Trump mocked as “Pocahontas,” will not have a starring role in a Trump administration.
Some of the biggest beneficiaries of deregulation are likely to be banks, drug companies and oil and gas pipelines. On Wednesday, shares in JPMorgan Chase rose 4.6 percent, the biotech concern Biogen jumped more than 8 percent, and the pipeline operator Kinder Morgan rose 4.5 percent.
Whether the “Trump rally” persists is another question. In their rush to buy stocks this week, investors seemed all too willing to ignore Mr. Trump’s hostile stands on immigration and free trade, as well as his seeming indifference to the federal deficit and the increased likelihood of higher interest rates. All of those have the capacity to damp growth or even tip the economy into recession.
Mark Zandi, chief economist for Moody’s Analytics, was, like many others, surprised by the strong market rally. “If we get a large stimulus on top of a full-employment economy,” he said, “it may give you some juice in the near term, but longer term, it’s going to hurt” by driving up interest rates and squeezing out other investments.
“I was a strong advocate of deficit spending and tax cuts when unemployment was at 10 percent,” he said. “It doesn’t make sense at 5 percent.”
Mr. Parker of Barclays said he expected a sell-off initially, but also called for a recovery by year-end once investors absorbed signals from key economic policy makers. “What we thought would play out over weeks played out over hours,” he said, pointing to Mr. Trump’s early-morning victory speech, which made no mention of trade or immigration, as one catalyst.
Like many, Mr. Parker now sees more gains for stocks if a Trump administration stays focused on a tax overhaul and fiscal policy, if real interest rates stay low and if inflation picks up. “The backdrop was and still is generally supportive of risk,” he said
