The market reacted to a President-Elect Trump exactly the way we expected it to – dropping as investors moved into an initial state of shock and fear at the prospect of four years under Trump, and then rebounding as those short-term reactions settled. This is similar to the market reactions we’ve seen to many big announcements with unexpected outcomes of late (i.e., Brexit), and reflects classic behaviorial tendencies.
The reality is that the Republicans now have control of the President’s office and Congress, which should end the partisan gridlock we’ve seen in Washington over the past 8 years. Donald Trump is about deals, not details, which means he is likely to leave the heavy policy lifting to Paul Ryan and Mitch McConnell. There is a reasonable likelihood of comprehensive individual and corporate tax reform, significant fiscal stimulus, the dismantling of Dodd Frank, and a radical overhaul of Obamacare. Regulatory reform is also highly likely. This is all bullish for US equities.
The bad news is that Trump has consistently favored a mercantilist trade policy which could lead to tariffs and a trade war. If he also pursues a confrontational and belligerent foreign policy, that could undo many of the bullish aspects of his growth-oriented domestic policy.
The election of Donald Trump is an experiment unlike any in our history. America, likewise, was an experiment. It turned out much better than contemporary observers expected. Let’s hope the next four years do as well.