What Does a Trump Administration Mean for the Stock Market?

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What is the result of a Trump presidential administration on the stock market? How investors can protect against economic uncertainty.

On November 8, 2016, Donald Trump was apparently elected as president of the United States. As the results came in, global stock markets and the US futures market sank, and sank badly. At one point, the US stock market was estimated to have lost a trillion dollars of value.

By the closing bell on November 9, the major indexes had each gained more than a point on their close.

Why did this happen? What can be done about it?

Market Volatility Reflects Uncertainty

While daily market fluctuations often reflect short-term reaction to individual events, the value of the market as a whole tends to reflect what all investors believe to be the US and global economic potential for the foreseeable future. (See the efficient market hypothesis for more information.)

Furthermore, the price of stocks or bonds or gold reflects the risk of an investment. For example, if you don't know how the repeal of the Affordable Care Act will affect national health insurance companies (or health providers), you can no longer trust the financial projections of public companies in this sector. Where you might have had a steady 4% growth in an insurance stock, who knows what that will be now? It'll take time to figure that out, and that healthy and safe 4% return on investment may become a 25% loss next year.

Steel and Aluminum Tariffs Could Kick Off a Trade War

On March 1, 2018, Donald Trump apparently announced new tariffs on steel and aluminum imports starting the second week of March. The stock market responded poorly, with major indexes losing more than a percentage point each.

The argument for tariffs is nominally to make domestic steel and aluminum more appealing. After all, it could be 10-25% cheaper than imported goods.

Of course, imposing tariffs on another country makes it more likely they'll impose tariffs in return. This is a strange approach to take; the amount of economic damage China or India could do by adding a 25% tariff to American cars or durable goods goes far beyond what steel or aluminum the US imports from China. Increasing prices of materials reduces the potential profit of US businesses and increasing prices (that companies won't see) on their goods reduces their sales and, thus, their profits.

If the administration really wanted to address unfair trade practices, it has multiple methods to investigate dumping strategies or encourage better pricing and supply methods, rather than using a very blunt instrument like tariffs. (It could also use diplomacy or negotiation or anything other than a hastily suggested plan—but that's not this administration.)

A Trump/Republican Economic Policy is Risky

The initial take on a Trump/GOP economic policy is "prepare for a global recession". No one can predict what will happen, of course, but it's easy to see the risk of:

  • Curtailing federal investment in infrastructure
  • Cutting government spending on social programs (especially where the economic multiplier is high)
  • Cutting federal revenue by reducing taxes on the wealthy
  • Throwing 22 million people off of their health insurance
  • Enacting harsh tariffs and protectionist trade policies (as mentioned)
  • ... and whatever other policies may or may not be enacted

If you think that's an unfair characterization, remember that people in this administration have, in the recent past, suggested that a global banking cabal controls the world, that the Federal Reserve is a politicized system rigging the dollar, that the gold standard would stabilize the economy, and that the economic recovery under the Obama administration (including some 15 million new jobs) actually represents a lost of tens of millions of jobs.

A micro- or macro-economic policy based on these assumptions is inherently unpredictable, because it's devoid of any connection to measurable reality.

The first day's worth of changes (+1.4% DJIA, +1.11% S&P 500, +1.11% NASDAQ) reflect that the sky hadn't fallen, yet. Though Trump had shocked many people by suggesting he might not accept the results of the election (and given many indications he had authoritarian leanings), his acceptance speech struck notes of reconciliation. Yet it's still early to tell what could happen.

A Chest-Thumping Foreign Policy Could Lead to War

War may be good for defense contractors, but it's bad for trade. It's bad for health care costs. It's bad for domestic investment. It's bad for predictability in markets.

Uncertainty is the Biggest Risk of All

Any time a global power has a transition of power between two different political and economic policies, uncertainty rises. The US economy had problems throughout the Obama administration, certainly, but things had improved since 2007 as a whole and were getting better. A dramatic shift in the power structure, one which believes that government can do nothing right (and should do a lot less), and that, despite almost all evidence to the contrary, suggests that the improved structure was on the wrong track, has the potential to change a lot of things.

Things could be better under a GOP-led America. Yet as an examination of Trump's economic policy advisers suggests, this may be long on wealthy men with cutthroat business experience and short on people who actually understand economics as a whole. (Yes, there's a difference between having succeeded at a specific business or in a specific industry and being able to articulate, direct, and execute an economic policy for an entire nation.)

The essential point of data that can be known right now about the effects of a Trump administration on the economy and, by extension, the stock market, is that no one knows for sure. Until more information is available, the markets as a whole will set stock and bond and precious metal prices as if something bad could happen.

Where Should You Invest During a Trump Presidency?

If you watched your investments shed a lot of value on paper after the election, you may be wondering where smart money goes. The answer is, as always, it depends.

Despite this period of uncertainty, even if there's a US or global recession, the US is likely to recover. No one can predict when that will be (it took several years to recover from the 2007/2008 recession), but the strength of the US economy in creating goods and services, importing and exporting, improving productivity, inventing new things and improving existing things, is still as strong as it ever was. The federal government can help or hurt that with its policies (for example, raising interest rates to fend off the as-yet-unrealized spectre of inflation could be disastrous), but the US is still the strongest world economy and the dollar the strongest world currency for a good reason.

As of this writing, a lot of money is flowing to bonds (with their guaranteed yields) and precious metals (which are often a hedge against uncertainty). Yet value investors should always be looking for bargains, not necessarily timing the market trends.

It's painful to see a 401(k) lose double-digit percentages due to perceived political and economic policy instability. It's worrisome to think about all of the people who may lose their jobs due to ill-advised decisions made with few checks-and-balances. The market believes, to some degree, a Trump administration with a willing GOP Congress could hurt a lot of people.

Even so, the US will survive, and the markets will survive, and careful, clever investors will see their money grow, because the opportunities are still out there, despite short-term fluctuations.

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