The Trumping of the Stock Market

So prior to November 8, the conventional wisdom went something like this: Donald Trump has next to no chance of winning the highest political office on planet earth. But, IF the unthinkable were to happen and Trump actually won, then the market would crater similar to the days following the June Brexit vote. My colleagues and I never bought into the first hypothesis. We thought Trump had at least a 50% chance of winning, especially against such a flawed candidate as Hillary Clinton. But because the market often gets hysterical when surprised, we believed there would be a near-term sell-off if Trump were to win followed by longer-term gains. I repeatedly told any and all who asked to use the hysteria as a buying opportunity. I surmised that like with Brexit, the sell-off wouldn’t last long. It was a whopping two days in late June.

At Woodard and Company, we were ready for an election surprise and had over $60 million set to buy. The anticipated Trump sell-off happened overnight when world markets plunged and Dow futures tanked 900 points, almost the same as the two-day skid following the Brexit vote. We were able to buy for our clients on Wednesday morning at the opening bell with the market Dow still off close to 200 points. And since then, the Dow Jones Industrial Average has been on a tear, even setting record highs.

So what happened to the nearly uniformly-predicted debacle? How did so many pundits misjudge the Trumping of the markets? Well in the first place, as with Brexit, nothing fundamentally changes overnight. We don’t suddenly enter a recession just because of a presidential vote, any more than we did when one country voted to leave the European Union. Stocks in the long run always trade on fundamentals. The more profitable a company is, the higher its stock eventually goes.

Nevertheless, psychology can be powerful in the short run. And in essence, we are currently seeing psychology take over, but not the psychology of fear as had been anticipated by many. Instead, we seem to be caught in a near euphoric vortex, sucking certain segments of the stock market ever higher. It’s kind of a bizarre Twilight Zone of stock happiness.

“So what’s going on?” you rightly ask. Well I believe the giddiness surrounding Trump’s election can best be understood by discerning his most likely policies, especially those policies that differ markedly from what Clinton’s would have been.

The obvious one is healthcare. Hillary would have been on the prowl, beating up drug companies and attempting to gut them of “exorbitant” profits. Trump and a republican-controlled legislature are perceived to be much friendlier toward “profit” in healthcare.

The same could be said about financial and energy stocks. Trump’s stance against over-regulation should definitely help both these sectors. If some of the more onerous aspects of Dodd-Frank are repealed, banks in particular should benefit.  With energy, Trump has promised to unleash the chains of the left’s “green” agenda. Investors are also betting on unfettered exports of oil.  If that happens, demand for American oil could significantly increase. Additionally, Trump’s promise of less regulation will help just about all American companies become more profitable.

Then there is the possibility of bringing billions of American corporate cash home currently parked overseas due to the high cost of repatriation. This has investors salivating over prospects for mergers, acquisitions, stock buybacks and good ‘ole business investment that a repatriation tax holiday would portend.

But “trumping” all of the aforementioned factors, as bullish as they may be, is the prospect of real corporate tax reform. The funny thing is the concept of corporate tax reform has been supported by many in both parties. Yet the acrimonious nature of Washington prevented any bipartisanship on the issue. Now, the calculus has changed with one party control. IF the Republicans can truly slash the top corporate tax rate down to 15% from 35%, close down loopholes and level the playing field with the rest of the world, the stock market would have to push higher. And while I’m not sure all of this will “make America great again,” it certainly can’t hurt.