When Donald Trump shocked the world by winning on November 8, the stock market initially fell. In the months since then, the market has performed admirably with the Nasdaq making returns of 7 percent and the Dow Jones of 8 percent since Election Day. And in the five days leading up to the election, we have witnessed a slide with the Dow Jones falling 100 points Thursday afternoon according to CNBC.
Republicans and Democrats will use the ups and downs of the stock market to make political hay for the next four years as they have always done, but what does this stock slide mean for investors? While we should not overreact and claim that this slide means some imminent economic downturn, investors are finally waking up to the potential economic downsides of the Trump administration as he prepares to take office.
That does not mean that the Trump administration will necessarily be bad for the market in the long-term, and Trump has promised certain measures which could bear positive results. But this stock slide is an indication that investors are nervous about what he will do, and we should continue to expect market jitters for at least the short term while we see just how Trump and the Republicans will govern.
Reasons for the surge
The market’s recent surge was surprising given that analysts had suggested during the election cycle that Hillary Clinton would be better for the market compared to Trump. For example, CNBC stated in an op-ed right before the election that “investors clearly believe that a Hillary Clinton victory will be bullish for stocks and other risk assets and a win by Donald Trump would not be.” It was supposed that investors would prefer the stable hand of Clinton compared to Trump’s eccentricities.
Then why did the market surge after Trump’s victory? Some of it is because investors have decided to look at the potential upsides of a Trump presidency.
For example, Trump has talked a great deal about a massive $1 trillion infrastructure plan which would rebuild American roads and bridges. While some individuals like Larry Summers have criticized the details (or lack of them) in this plan, this infusion of government money could help the economy, never mind the general benefits of repairing dilapidated roads and bridges. While Clinton had her own infrastructure plans, Trump should have an easier time getting his plan through the Republican-controlled Congress. Investors are also interested in other ways Trump could boost the economy, whether by reducing regulations or by cutting taxes.
But it should be noted that the stock market surge cannot be entirely credited to Trump. The U.S. economy has been performing well over the past few months as wages are rising and the labor market reaches full employment. Under these circumstances, it is hardly surprising for the stock market to be performing this well regardless of who is in the Oval Office.
Challenges for Trump
Despite the recent slide, the stock market and the economy are in generally good shape as Trump prepares to be sworn in. We saw similar tumult on the London Stock Exchange following Brexit, so we shouldn’t be surprised that the markets respond unpredictably to uncertainty. But that is a problem in and of itself for Trump, and the recent slide is a precursor as to what his problem could be.
If the economy is performing well, then the logical response is to not rock the boat. But if there is anything we can count on Trump to do, it is rocking the boat. No one doubts that Trump will be an active president. While investor may like some of his ideas such as greater infrastructure spending, they definitely do not like some of his other proposals.
Some of those proposals are the few which Trump has stayed consistent on throughout the election circle such as his desire to pull out of international agreements like NAFTA. If Trump launches a trade war as some political analysts fear, the U.S. economy will be severely affected if not go into a recession.
So as Trump prepares to be sworn in, concerns about economic instability are likely leading to this recent downswing, and will likely negatively affect the stock market for the very short term. But don’t forget that Trump is still limited by a Republican Congress, many of whom are leery of Trump at best. While some short-term instability may be expected, there are limits in how much Trump can really change.
Watch Congress carefully
As Trump prepares to be sworn in, you will have analysts predicting that the next four years will either be the Apocalypse or the Rapture. But while no one really knows what Trump is going to do, there is no doubt that things will be different. There will be some early-day jitters at the least in the next few days as Trump prepares to blaze forward, but investors should still assume that 2017 will be a good year for the market. If you remain worried about how Trump will affect the market, do not overreact based on what he tweets or says. Pay attention to the actual policies which the Republican government crafts, and hope that Trump will not launch America into a trade war and economic isolation.