What a roller coaster ride stocks markets have had over the last 24hrs! Many were stunned to see Trump win the US Presidential race last night, and even more surprised to witness the rally in stock markets today. The initial US reaction to the TRUMP Victory was decidedly negative with DOW futures plunging down nearly 800 points, only to close trade up 1.4% or 256 points (about 40 points shy of its all-time closing high). Some market pundits where predicting the S&P500 would crash, shedding half its value, and that the dollar would get obliterated, with a Trump win.
The market actually fell last week when Trump was seen to be gaining ground in the polls after the FBI reopened the probe into Clinton’s private email server.
Many clients have asked me today “Why did the market rally today?” Here are 5 theories:
1. Fiscal Stimulus
During Trump’s acceptance speech he reiterated his intention to increase infrastructure spending and create more jobs for Americans. He also spoke about making sweeping tax cuts. Many economists and market participants view fiscal stimulus as a more practical way of lifting stocks higher, after a lengthy period of diminishing returns from central-bank monetary policies.
2. Markets like Certainty
We have witnessed many rallies after certainty of information has come to light over the last decade. The market reacts negatively to uncertainty. Most recently the market impact post BREXIT (although initially dropping) has been decisively positive with the market rebounding to recapture all of its lost gains. The US electoral campaign has been a very contentious and volatile, so one could argue certainty of government has led to market confidence.
3. Full control of the three arms of government
The Republicans won more than the presidency last night — the party also held onto its majorities in the House and Senate. And for the first time since 2007, Republicans will control both the executive and legislative branches of government.
The stock market prefers the idea of a clean sweep, and control of the legislative branch will near-certainly make it easier for President-elect Donald Trump to pursue significant policy change.
4. The economy and markets have held up
The bitterly fought race has largely obscured the positive news coming through on the US economy and how well both the economy and stock markets have help up. The S&P500 on Wednesday traded above its 50-day moving average for the first time in weeks.
5. The Crash is yet to come
There are speculation hedge funds and other investors unwinding wrong-footed bets that supposed a Trump loss, have helped to drive equity markets higher. Maybe the market is yet to digest the true impact of Trump in the white house, and when his policies crystallise in investors eyes we may witness the nose dive that many speculators are predicting. How Trump deals with policy specifics could either reassure markets or rattle them further.
Australian Equity markets have been flat for so many years that many investors are getting frustrated and looking for strategies to take advantage of these volatile times. Take a look at the following returns in the ASX200 over the last 10 years:
1 year – 1.13%
2 years – Negative 6.65%
3 years – Negative 3.16%
5 years – Annualised returns of 3.71% p.a.
10 years – Negative 5.15%
If you want to find out how you can capitalise on market falls and profit from market rallies, then click on the link below. Our Sapient Investment white paper booklet is free to download and provides an in depth summary of our Protected Equity Portfolio (PEP) Strategy, where we use long dated put options as an insurance against market falls. This allows our clients to enjoy all the upsides of markets rallies without the normal downside risks of market falls. In an analysis of one of client’s portfolios today we determined where the underlying stocks bought had fallen around 20% since May 2015 (BHP, NAB & ANZ), by using our Protected Equity Portfolio Strategy he was up 13% with more stocks!
We at Sapient are both Self-Managed Super Fund experts and Investment Advisers. Contact us now to put yourself in the driver’s seat to take full advantage of these volatile times.