The election day Financial Times headline, “Markets rally as surveys show Clinton hanging on to slim lead,” was emblematic of pre-election prevailing wisdom – a Clinton White House with a Republican House of Representatives, a perfect checks and balances scenario. It would provide enough gridlock to prevent, or at least stall, some of the more anti-business and progressive rhetoric from the Democratic campaign platform. As election night wore on and exit polling indicated that voters were most concerned with wanting change, results from key states were signaling a deterioration in Hillary Clinton’s lead, and before long futures markets were in a tailspin as the prospect of a Trump upset wasin the making.
The Mexican peso, for example, which had unceremoniously served as a barometer for which candidate was in the lead, plunged to an all-time low on the prospect of a Trump victory, while gold and Treasury prices gained as investors, globally, sought refuge in safe haven assets. A prominent hedge fund manager further fueled market tremors as he warned clients that the market would sell off almost ten percent with a Donald Trump victory.
On November 9th, with Trump’s “presidential” victory speech, markets swiftly changed course and focused squarely on what a Republican clean sweep could mean for the economy as well as for corporate profits: significant changes to the tax code for both individuals and corporations, with the statutory corporate tax rate brought down from 35% to a level competitive with other developed nations; a potential for a repatriation holiday for the nearly $2.5 trillion that are being held abroad; a rollback in regulations across all sectors and corporate sizes; and fiscal spending on major infrastructure projects.
Moreover, following the election, commentators suggested that a Trump administration would usher in the return of a confident mindset as imbued in “animal spirits,” the term coined by John Maynard Keynes in “The General Theory of Employment, Interest and Money,” published in 1936: “Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large portion of our positive activities depend
on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out ... can only be taken as a result of animal spirits – of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.”
Indeed, Ray Dalio, the founder and chairman of Bridgewater Associates, the largest global hedge fund, wrote that with regard to igniting animal spirits, the incoming pro-growth/ pro-business administration can “spark a virtuous cycle in which people can make money, the move out of cash to risk-on investments could be huge.” Dalio likened the transition from Obama’s policies towards a Trump agenda as significant as the shift in the United Kingdom when it embraced capitalism under Margaret Thatcher in the 1970s, and China’s move towards accepting capitalism during the 1990s.
In Other Words, A Game Change
On November 9th, markets closed higher and the march toward Dow 19,000 began in earnest, closing at 19,023.87 on November 22. No sooner had that milestone been reached, Dow 20,000 became a media obsession, interesting because professional investors scoff at the intense focus on the Dow Jones Industrial Average (DJIA) and consider it a “Main Street” index as opposed to the more substantial S&P 500 Index. Still, Dow 20,000 was clearly in the spotlight as it ended 2016 tantalizingly close.
Confidence surveys across a myriad of business segments, as well as consumer reports, surged following the election. This suggests that optimism about the Trump platform, along with his cabinet nominees, underscores his commitment to pulling the economy out of the lethargic range associated with the post-recession economic landscape. On March 27, 2015, Federal Reserve Chair Janet Yellen invoked the term “secular stagnation” when she said that while she didn’t expect the U.S. economy to fall into the kind of persistent stagnation associated with the Great Depression, it was only at the margin a risk.
The concept was introduced in 1938 by Alvin Hansen,an economics professor at Harvard, to describe the country’s stagnant economy in which positive catalysts, such as technological progress and population growth, were severely depleted. Former Secretary of the Treasury and Harvard professor Lawrence Summers resurrected a modified version of the term to understand the lack of any underlying spark in today’s economy and concluded that public infrastructure spending could help to spur significant growth. Chair Yellen, surprised – and to some degree – unnerved, investors when she pointed to recent studies that raised the possibility that the United States, along with other countries, could grow more slowly as a “result of both demographic factors and a slower pace of productivity gains from technological advances. At an extreme, such developments could even amount to a type of ’secular stagnation,’ in which monetary policy would need to keep real interest rates persistently quite low relative to historical norms to promote full employment and price stability, absent a highly expansive fiscal policy.”
CEO confidence in future business conditions spiked almost 11% following the election according to the Chief Executive Network, with the economy and jobs their top priority. Similarly, business leaders have, for the most part, expressed confidence in, and are encouraged by, “President-elect Trump’s pledge to boost economic growth,” said Business Roundtable Chairman Doug Oberhelman, recent CEO of Caterpillar. The Business Roundtable cited regulations as their top cost pressure, along with labor and healthcare costs. “We are encouraged by the promise of renewed focus to usher in a smarter regulatory environment that promotes job creation and economic growth and also protects safety, health and the environment,” Oberhelman added.
That said, many CEOs of large corporations expressed concern regarding potential trade and tariff conflicts if Trump follows through with his more dire campaign promises. Microsoft business icon Bill Gates offered a strong vote of confidence for the Trump agenda, telling reporters the president-elect has a chance to forge “American leadership through innovation.” Likening a Trump administration to President Kennedy’s space initiative, he continued that the Trump platform could “organize things, get rid of regulatory barriers, and have American leadership through innovation.”
The President and CEO of the National Federation of Independent Business (NFIB), Juanita Duggan declared, “What a difference a day makes. Before election day, small business owners’ optimism was flat, and after election day it soared.” Duggan explained that while small business owners are encouraged by the election, “federal taxes, regulations, and Obamacare are the three biggest impediments to running a small business in America.” Small business owners have high expectations that the Trump administration will address these issues, according to Duggan.
2/4 Q1 2017 Edition

The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) also enjoyed a post-election bounce, with a reading that climbed to an eleven-year high. Despite the rise of mortgage rates, the NAHB December 15th press release stated that the notable rise in sentiment is “largely attributable to a post- election bounce as builders are hopeful that President- elect Trump will follow through on his pledge to cut burdensome regulations that are harming small businesses and housing affordability.” A recent NAHB study indicates that regulatory costs associated with home building have increased almost 30% over the past five years.
Given that consumer spending constitutes approximately 71% of the U.S. $18.56 trillion economy, consumer confidence surveys are important barometers of the health and trajectory of the economy. It was significant that following the election, the University of Michigan Final Consumer Sentiment Index for December reached 98.2, its highest reading since January 2004. Richard Curtin, chief economist for the survey, noted that, in general, the gain in confidence was “based on anticipated policy changes, with specific details as yet unknown. Such favorable expectations could help jump-start growth before the actual enactment of policy changes, and form higher performance standards that will be used to judge the Trump presidency.”
The Conference Board’s Consumer Confidence Index® also showed confidence rising and reaching a 13-year high, but warned that “consumers’ continued optimism will depend on whether or not their expectations are realized.”
The Economic Landscape
With the fast and furious post-election stock market moves, it may be easily forgotten that we began the year with a series of data disappointments, so much so that those with bearish inclinations were projecting an impending global recession or serious downturn. Oil prices sank to $26 a barrel and worries intensified over China’s ability to bolster growth, while Europe seemed poised for deeper deterioration. Increasingly, the Federal Reserve’s December 2015 call for four rate hikes in 2016 looked improbable. In fact, many analysts were suggesting that the Fed would have to ease rather than tighten, and the subject of negative interest rates began to surface.
Economic gauges began trending higher, albeit mixed, and with the scare of the Brexit vote easing, a clutch of positive economic releases eclipsed any lingering worries over the actual legal and political process of Brexit. For investors, so conditioned to “good news being bad news,” it was unusual but clearly welcome to see the market enjoying a rally despite concern that stronger data could finally prompt the Fed’s move on rates. The litany of positive economic surprises was good news, as were signs that the six quarters of a corporate earnings recession were easing.
The surprise Trump victory has triggered hopes that the economy can finally escape from the restraints imposed by a burdensome regulatory environment, high corporate taxes and a cautious view of corporate capital spending and research. For investors, the transition from a monetary policy of “lower for longer” underpinning markets, to one in which a broad swath of fiscal policies is introduced, should provide the sort of stimulus that stirs a form of confidence that leads to a surge in demand for goods and services.
However, as the buoyant post-election surveys clearly demonstrate, follow-through on specifics – and maintaining positive momentum – is key for individual consumers and businesses.
On a broader, macro-economic and political level, concerns are focused on a broad range of headwinds that could jeopardize, or stymie, the Trump agenda, and hence, the market’s performance. These include:
a) the slowing of the business cycle, and whether or not it can be extended significantly with a pro-growth/pro- business friendly administration;
b) corporate profits beginning to slow this year as higher unit labor costs hurt the bottom line; although corporate tax cuts and a more business-friendly regulatory regime are expected to help profits, beginning in late 2017;
c) higher bond yields hampering interest in the stock market, but many economists expect that rates will remain low as the higher yield has attracted buying interest from global pension funds;
d) growth possibly picking up in a meaningful way and the dollar continuing to climb, may hurt the competitiveness of multi-national corporations, but a stronger dollar should help subdue inflationary pressures and help spur consumer spending;
e) continued concern over China’s growing debt problems and stringent capital controls, and the leadership’s ability to keep growth on track; as well as a potential trade war with the world’s second largest economy;
f) upcoming elections within the eurozone that could see populist, anti-euro governments lead;
g) escalating tensions with Russia.

Wishful Thinking?
With post-election headlines acknowledging the onset of a regime change, many questioned if the exuberant investor response was markets indulging “in make-believe over a Trump presidency,” as Financial Times columnist Robin Wigglesworth wrote. Nagging concerns “will quickly manifest themselves in a fierce stock market rout should Mr. Trump revert to his campaign persona. There’s giving the president-elect the benefit of the doubt; and then there’s credulously believing that he is Ronald Reagan incarnate. At the moment markets are tilting too much towards the latter, blithely ignoring his more problematic policies.” As The Economist succinctly stated:
“Take his policies first. After the sugar rush, populist policies eventually collapse under their own contradictions.”
Americans voted for change, and that’s what they got with the Trump victory. But what the stock market saw going into 2017 was something beyond the election itself. Markets cast off concerns about the 3:00 a.m. tweets, the reality show character of the primary season, the vagaries of the campaign, and the day-to-day combat leading up to election day, and instead zeroed in on the economy.
And the market vote was swift and clear. Optimism and confidence are once again in the headlines. To be sure, there will be hurdles and obstacles along the way, along with market pullbacks, but markets are inherently inclined to climb the proverbial wall of worry. For now, investors are seeing a game change, but if the critics are correct, there will be yet another game change, and markets – currencies, fixed income, commodities, equities – will see it coming, just as it’s now seeing a more vibrant U.S. economy on the horizon.
Quincy Krosby, Ph.D., is chief market strategist at Prudential Annuities.