You have to wonder how stock market analysts got this so wrong.
After all the predictions that the stock market would tank on a Donald Trump presidential victory, the market did none of that Wednesday. Instead the Dow Jones Industrial Average climbed almost 300 points.
Perhaps the pre-election doom and gloom stock market blabber was never about investing, but rather about political spin. Or maybe level heads prevailed after learning last summer that knee-jerk stock selling after a major vote — in that case the Brexit vote of June 23 — doesn’t turn out well. After the British vote to leave the European Union, the economy didn’t plunge into ruin. Instead, politicians started talking about paths more moderate than pre-voting rhetoric would have suggested. European stocks are down 7 percent this year, which is disappointing for investors but not a disaster. And the Dow is up about 7 percent for the year.
Wednesday in the U.S. there was no sign of the 15 percent stock market drop some predicted upon a Trump win, and Wall Street’s talkers in the first hours after the surprise Trump election now are chatting up the positives his presidency could provide to the economy and investors.
The particulars will evolve, possibly with the market quaking at times upon new Trump rhetoric on erecting barriers to trade and relationships with foreign governments. But now analysts are taking a wait-and-see approach.
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Here are four things investors need to know in the wake of Trump’s upset victory:
Expect occasional market volatility: Analysts now think the markets are more likely to take their cues from the economy and corporate profits than from political rhetoric, although there could be short-term blips of volatility based on controversial or outrageous comments by Trump.
The expectation is that the market will soon start to behave as it typically does after shocking events have passed. The profits companies generate, and signs of a growing economy, will be key. But there could be a few days of adjustment in the stock market before that routine course of investing kicks in. That’s because professional stock traders bought, sold and borrowed stocks during the last few days based on what they thought a Hillary Clinton win would mean for particular companies and sectors in the economy. Those moves were based on faulty assumptions, so market volatility is likely as the traders switch investments based on the new reality.
The adjustment could send misleading signals on what stocks are desirable, so now may be the time for individual investors to sit still rather buying or selling.
When the temporary trades are completed, however, analysts expect the stock market to start responding more to corporate and economic signals about the future. Meanwhile, sharp downturns based on Trump rhetoric could be opportunities to buy stocks, said Jim Paulsen, chief investment officer for Wells Capital Management.
Pay attention to how companies are performing: Companies as a whole, measured by the Standard & Poor’s 500, have been suffering declining profits each quarter this year. But the challenging times for companies are easing — giving investors reason to be optimistic about the stock market. Third-quarter profits are expected to increase 2.9 percent. Growth is being led by companies in financial, basic material and utility businesses. The largest declines are in energy companies and telecommunication services.
Despite better profits, however, stocks could struggle to climb significantly because stock prices are already relatively high compared with expected profits. If investors think a Trump presidency will drive more economic growth through infrastructure spending, tax changes and reduced regulation, stocks could climb. But if investors worry that his trade policies will hold back business profits, the economy could slow, especially if companies are uncertain about the future and executives delay expansions or hiring people.
Duck if interest rates upstage Trump enthusiasm:
The Federal Reserve is expected to increase interest rates in December, and with that major change coming, investors could react more to that than to the new president, analysts say.
When interest rates rise, people will be able to make more money on bond interest rates and CD interest rates and they may not be as willing to take a chance on stocks. And rising interest rates also have the potential to slow down business investment and home buying. If the Fed raises rates, it will cost more for businesses to borrow money and it will cost individuals more monthly to make their mortgage payments.
Jack Ablin, chief investment officer of BMO Wealth Management, said that as he deals with client investments he will be more focused on the direction of interest rates than Trump in the months ahead, and added that he would be leery about increasing bond investments at this time.
Watch to see if Trump follows through: If Trump and Congress seem in agreement on tax changes that will cut business taxes and allow American companies to bring profits from overseas back into the U.S., that will play well with investors. They will anticipate a surge of economic growth and then buy stocks.
Stocks such as AbbVie, based in North Chicago, were among the strongest performers Wednesday. That stock rose 7 percent on the assumption that the company would have more flexibility with its overseas profits under Trump’s tax changes. Also, investors are no longer worried about regulations a Clinton administration might have enacted on drug pricing.
Biotechnology and pharmaceutical companies rose sharply Wednesday. Also rising were companies such as Peoria-based Caterpillar, under the assumption that Trump would try to boost jobs and the economy by pushing for a major infrastructure building program. Caterpillar stock rose nearly 8 percent.
Meanwhile, the Mexican peso plunged sharply, based on the expectation that Trump’s trade policy would interfere with business between the U.S. and Mexico. Analysts think questions about Trump’s international policies could put pressure on companies doing a lot of business in countries ranging from Mexico to China. The results were obvious in stocks, such as Apple, declining. The company has a major presence in China.
Trump’s plans will take time to play out, but the markets seemed comforted Wednesday by the realization that he won’t be able to dictate make major changes without building political support in Congress. More immediately, markets will react as Trump starts announcing his Cabinet. Investors will be watching for Trump advisers with respected credentials, not old Trump buddies.
Twitter @gailmarksjarvis