As it became apparent that Donald Trump was going to win the presidency S&P 500 futures fell 500 points and triggered the circuit breaker. Stocks fell across Asia. And by morning there was some recovery on all fronts. The market does not like uncertainty which is why stock futures fell on the news of a likely Trump victory. But, as we mentioned before the election in an article on our sister site, Forex Conspiracy Report, don’t lose your money on a mistaken first impression.
[W]hat if first impressions are wrong? How many times has the market reacted in one direction to a presidential winner only to reverse direction a few weeks later? According to Bloomberg, that happened with the S&P 500 in 1964, 1968, 1980, 1984, 1988, 1992 and 2012. So, don’t lose your money on mistaken first impressions, whoever is the winner come the morning.
How the stock market will respond to a Trump victory will be depend on what policies are enacted and if the economy and therefore the market will benefit. Trump is essentially proposing another round supply side economics in which taxes are cut, especially for the wealthy, with the intent that subsequent investment generates more jobs and wealth. How has this approach worked before?
Supply Side Economics
Investopedia explains supply side economics.
Supply-side economics is better known to some as “Reaganomics,” or the “trickle-down” policy espoused by 40th U.S. President Ronald Reagan. He popularized the controversial idea that greater tax cuts for investors and entrepreneurs provide incentives to save and invest, and produce economic benefits that trickle down into the overall economy.
Like most economic theories, supply-side economics tries to explain both macroeconomic phenomena and – based on these explanations – offer policy prescriptions for stable economic growth. In general, supply-side theory has three pillars: tax policy, regulatory policy and monetary policy.
The argument against this approach is that increasing the supply of goods and services by aggressive investment does not guarantee increased demand. The Reagan years in the 1980’s followed by the Bush and Clinton years up to 2000 we generally good for the economy. The second Bush presidency applied the same approach with tax cuts and ended up with the second worst recession in U.S. history. If Trump and the Republican House and Senate follow this approach we might expect to see early growth and a higher stock market followed by a bubble and crash. The other aspect of Trump’s stated plans is investment in U.S. infrastructure.
Exactly a year before the U.S. elections we wrote about tax free investment in United States infrastructure. Both Trump and Clinton talked about investing in infrastructure improvement during their campaigns.
While interest rates remain near zero would be a great time to invest in United States infrastructure. The cost of tax payers would in fact be very low and the return on investment of infrastructure upgrade would more than pay for costs.
This sort of policy would create jobs, stimulate the economy and help the stock market. If that is the way Trump and the Republican congress goes we could expect the market to respond well to a Trump victory.