Investors are scratching their heads over the powerful stock market rally in the wake of Donald Trump’s victory in the presidential election.
It’s not hard to blame them.
After all, at one point on election night, as it became increasingly clear that Trump would win, futures on the Dow plunged 800 points. Yet by the end of the week, the Dow was 959 points higher.
Clearly investors are now seeing the Trump win in a more favorable light. Let’s look at why…
In eight years under President Obama, we did not have a single year of 3% economic growth.
That hasn’t happened since the 1930s.
Trump plans to shake things up by cutting corporate and individual tax rates, reducing heavy-handed government regulation and spending $1 trillion to upgrade and rebuild the nation’s roads and bridges.
All of these policies would help get the economy moving again.
Better GDP growth leads to job creation, higher wages, greater consumer spending, bigger corporate profits and more tax revenue.
All good. Especially when you remember that 3% economic growth isn’t just 1% better than 2% growth. It’s 50% better. (And 4% growth, of course, would be 100% better.)
A stronger economy will also lead to more business investment. In each of the last three quarters, private nonresidential investment – a proxy for business investment – has declined.
But by reforming the tax code and reducing the strangulating effect of government red tape, Trump would raise the rate of return on private investment, incentivizing new investments in plants, equipment and worker training.
Investors are also celebrating the end of gridlock. Obama and Senate and House Republicans couldn’t agree on what to have for lunch.
But with both the executive and legislative branches in Republican hands, Trump will quickly sign into law the pro-business reforms that Congress sends his way.
However, it’s worth remembering that not everything Trump promised would be a plus for the economy.
He promised to slap 35% tariffs on imports from China and Mexico. That may play well to the folks in the Rust Belt who have lost jobs. But it would hurt U.S. manufacturers like Apple (Nasdaq: AAPL) and Ford (NYSE: F) who build products overseas.
If history is any guide, it will also lead to counterproductive trade wars. When we hit countries with high tariffs on their exports, they retaliate with tariffs on our exports. We tried this with the Smoot-Hawley Act in the Great Depression, and the world economy contracted 25%.
Trump also promised to renegotiate NAFTA and the Trans-Pacific Partnership. Again, this anti-free-trade, anti-globalization rhetoric sells in some quarters. But it doesn’t work in the real economy.
Why does the flat-panel HDTV that cost over $10,000 in 2003 cost less than $500 today? Globalization.
How can you buy fresh fruits and vegetables in the dead of winter? Globalization.
Why does an $8 million supercomputer from two decades ago sit in your pocket and cost less than $200? Globalization.
Free trade and globalization give us a huge selection of high-quality products and services at a lower cost. The problem is it raises the living standards of all of us at the expense of some of us.
The benefits are diffuse and hard to comprehend, while the drawbacks are concentrated and easy to see. That’s why economic populism is ascendant these days.
We’ll have to see which policies Donald Trump brings to fruition and which were just talking points in the long campaign.
But investors are betting that the pro-business policies will be enacted first.
And with low inflation, inexpensive energy, supercheap interest rates, and an economy that is likely to pick up steam in the year ahead, stocks remain the place to be.
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Source: Investment U