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The post-election exuberance is partly investors’ reaction to a swift election result — and partly a response to Trump’s proposed economic policies, says John Bai, Northeastern professor of finance.
The stock market rallied to record highs this week following news of a second Donald Trump presidency. On Wednesday, the Dow Jones logged its best day in two years, and the S&P 500 and the Nasdaq also reached new heights as well.
“The number one rule in the stock market is that the stock market doesn’t like uncertainty,” Bai says. “But it does like the resolution of uncertainty.”
It was a similar story in 2016, when election night uncertainty was turbocharged.
“If you go back to the night of Election Day in 2016, the Dow Jones Futures dropped somewhere in the 700-point range, and the reason for that was, as much as everyone was expecting Hilary Clinton to win, when the votes were being counted and revealed in the battleground states, you saw a late shift toward Trump,” Bai says.
But on the second day, the stock market rose. That is generally what happens in the aftermath of an election, when investors grapple with a new reality.
“Once a winner is declared, the stock market starts to analyze and digest the policies that come with the winning president,” Bai says.
This time around, as results came in on election night, it was telegraphed almost from the start that Trump was performing well — momentum he carried throughout the evening and into Wednesday.
“If anything, Donald Trump’s margin started to take off as later votes poured in,” Bai says.
That the election was called in a matter of hours came as something of a shock to many observers, who were bracing for potentially weeks of legal challenges and other delays.
Trump’s decisive and relatively swift victory was one factor that buoyed investors, Bai says. Another was the expectation that his policies would carry over from 2016 — or at least take similar shape.
Broadly speaking, Bai says that the market’s read on Trump is that he will continue to be “pro-growth, cut corporate tax rates and encourage a larger market-driven economy,” with more reins on the federal government. Trump has signaled that he would put billionaire Elon Musk in charge of reining in government waste in a new government efficiency role.
At the same time, Trump’s tariff plan could raise costs for households, as economic studies found was largely the case during his first term, when he instituted hefty tariffs imposed on foreign goods.
Trump’s first term saw, among other things, a trade war with China, a global pandemic and a stock market characterized by “wild swings and overreaction,” Bai says. He says the question this time around — once short-term excitement settles down — is the long-term impact of policies yet to be unveiled.
For new investors, now is as good a time as ever to dabble in the stock market.
“If you are an inexperienced investor and just want to get in the game, I think the best bet is to go with the overall market indices: the S&P 500, Nasdaq,” Bai says.
Bai says he wouldn’t give advice with regard to investing in specific stocks (the “safe bet” is the S&P 500).
But if you wanted to spice it up, he says investors can add some ETFs, or exchange traded funds, to their portfolio as well.
“If anything, the United States is still the leading technological engine, and if policies are going to be shifted back to the U.S., I think consumers reap the benefits, depending on the price level and how things play out,” he says.
“But even from a company’s perspective, just the corporate tax reduction plan and deregulation alone are going to result in corporate profits going up over the next four years. This is the anticipation,” Bai says.