Thursday, November 10, 2016

Donald Trump’s Presidency Might Buck Old Market Trend

U.S. stocks’ typically do worst during the first year of a presidential cycle.


By Steven Russolillo 
The Wall Street Journal
November 10, 2016

“The happiest place on Earth,” other than Donald Trump’s election headquarters, may put a smile back on investors’ faces when it reports earnings Thursday.

Predicting that growth stocks such as Walt Disney Co. will thrive in the early days of a new administration bucks historical evidence, though. U.S. stocks typically do worst during the first year of a presidential cycle.

Since 1833, the Dow Jones Industrial Average has averaged a 2.5% gain in the first post-election year, with more down years than up, according to the book ”Stock Trader’s Almanac.” If one must be in the market, then defensive yield payers offer some income and protection.

But past isn’t prologue. Much of stocks’ slow start is due to new presidents typically overpromising the implementation of new policies and reforms on the campaign trail and under-delivering once on the job. Mr. Trump has advocated for less regulation, lower taxes and more fiscal spending. If implemented, those policies should help juice an economy currently stuck in its slowest recovery of the postwar era.

With Trump advisers set on making a splash and Republicans retaining majorities in the Senate and House of Representatives, he might avoid the gridlock that has crippled predecessors. Any successful implementation of these measures could boost growth, which in turn should benefit cyclical stocks.

What could go wrong? Plenty, including how far along we are in this bull market and economic expansion. Equity valuations are elevated and earnings are only now showing a glimmer of growth following four consecutive quarters of contraction. Mr. Trump has even warned that equity prices are in a bubble and said in August that he “got out” of the stock market.

But he probably would like nothing more than a vote of confidence from financial markets after getting one from the electorate. A nearly 1,000-point rebound in Dow Jones Industrial Average futures in 12 hours Wednesday certainly is a good start.

The bond market sent an even more convincing signal: The benchmark Treasury note yield surged above 2% and reached its highest level since January. That might anticipate stimulus and perhaps even a whiff of inflation—which would benefit growth stocks.

Mr. Trump’s script for the American economy is still under wraps, but in two short months it will be “lights, camera, action.”


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