Why Markets Fooled Investors After Trump Won

November 11, 2016

The immediate reaction in financial markets to Donald Trump's surprising triumph in the U.S. presidential election has confounded many. The way stocks and bonds have moved in the days following Trump's election has been the exact opposite of what most people thought would happen.

The S&P 500 rallied 1.3% in the two days after the election, while the narrower Dow Jones industrial average jumped to a record high on Thursday.

S&P 500

 

Meanwhile, Treasury bond prices tumbled, pushing the benchmark 10-year yield to as high as 2.15%, its loftiest level since January (bond prices and yields generally move inversely).

US 10-Year Bond Yield

 

What was supposed to happen―according to the pundits―was a plunge in stocks and a rally in safe-haven Treasurys due to the increased uncertainty that a Trump presidency brings. But as is often the case when it comes to markets, the conventional wisdom turned out to be wrong.

Two Theories On Market Moves

With the benefit of hindsight, there are two theories that explain this week's market moves. The first is that stocks rose thanks to anticipation of lower taxes and regulations, and increased fiscal spending on things like infrastructure in a Trump administration. At the same time, Treasury bonds tumbled due to the prospect of increased borrowing, growth and inflation as a result of Trump's policies (and those Trump policies became a bigger reality, with Republicans now controlling the White House, Senate and House of Representatives).

It's difficult to pinpoint exactly why markets move the way they do in any short-term period, but these explanations sound reasonable enough.

 

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