Donald Trump and the market reaction
In one of the biggest surprises in modern election history, Donald Trump has emerged as the President-elect and will take office in January. While some are overjoyed and some are dismayed, the markets are decidedly unhappy.
As of this writing, the markets are reacting negatively to a new president that ran on a pro-business, low regulation platform (among many other things). The reason is quite simple. The market first and foremost wants a stable environment and greatly dislikes uncertainty. Love him or hate him, Trump is bringing considerable uncertainly to the table.
As the numbers came in and it appeared Trump may win, the DOW futures, which provide an indication of where the market may open, were down over 800 points. As of this writing, the pull back was paired to approximately 400 points, indicating a more than 2% drop at the market open. In the short run, we expect the futures to pull back to more modest losses as reason sets in. A market drop of a few percentage points is likely. We expect volatility will rule the day and likely go on for a few weeks as President-elect Trump begins to articulate his priorities, build and announce his team, and set an agenda for his first hundred days. Should the market drop more than a few percentage points, we expect to be aggressive buyers and will be looking for opportunities across all markets.
Over the long run, we expect the markets to become indifferent to a Trump presidency. History has made it clear that market performance is not correlated to which party is in power.
The bottom line is that the markets care about only one thing, and that is earnings. Every stock is priced to reflect its potential future earnings. If a company has a good earnings outlook, its stock will reflect the earnings potential. If a company’s earnings are expected to decline, the stock price will adjust downward. Now, many things impact future earnings. Let’s take McDonald’s as an example. If McDonald’s sets the expectation that same-store sales and profits will rise because of a popular new menu being tested in small markets, the stock price will likely increase to reflect the expectation of higher future profits. If, instead, McDonald’s looks like it may lose sales because consumers trend towards other new fast food and fast casual restaurant concepts, then we would expect its stock price to decline to reflect the new outlook.
Many other things impact earnings. If interest rates are higher, then the borrowing costs of corporations are higher, cutting into their profits. High energy prices can be bad news for some companies like the airlines, and good for others like drillers. And on and on and on.
Presidents exert far less influence over markets than most believe. Yes, things like unemployment, tax policy and regulations can impact corporate earnings and therefore stock prices, but they are pieces to a much bigger puzzle. In the end, they are greatly outweighed by the success of the company itself and by far bigger issues such as interest rates.
The most important takeaway is that over the long run the stock market cares about only one thing — expected earnings. And the good news is, we all happen to be living in a time where our global markets are made up of the greatest companies to ever exist. There is more innovation and technological advancement taking shape now than at any time in our history, and that has a positive impact on earnings. As a group, over time, these great companies have really only done one thing — go up. Some presidents give it a nudge up, others a nudge down, but at the end of the day, earnings prevail and the world’s greatest companies have found a way to persistently earn larger profits. That leads us to the most important chart of all. The market doesn’t really see blue or red, only green. Regardless of your political persuasion, corporate earnings have only gone up over time, and the market has followed.