President-Elect Trump's Impact on Financial Markets

            On late Tuesday night, as it became clear that Donald Trump would become the next president of the United States, financial markets were on the brink of a freefall. By midnight, the S&P 500 Index was down 5%, the NASDAQ 100 down 5.1%, and the Dow down 4.3%, signaling a “rout in equity futures.”¹ When investors woke up on Wednesday morning, though, the S&P 500 had rebounded, “the greenback rose the most since the day after Brexit,”² and treasury 10-year bond yields had risen to their highest levels since 2013.³ By closing, the Dow industrials had climbed to a record high and were up 8% on the year.⁴ Per almost all quantitative measures, Wall Street had seemingly come to not only accept a Trump presidency, but embrace it with open arms.

            Despite his populist appeal and critiques of Hillary Clinton’s Wall Street ties, this should not be surprising. Trump’s stated economic agenda entails “a fiscal stimulus plan, tax cuts and a regulatory rollback,”⁴ with him specifically vowing to dismantle Dodd Frank because “banks are unable to lend... It’s slowed down growth.”⁵ The prospect of less regulation on Wall Street explains why financial stocks rose 4.1% on Wednesday; similarly, promises to repeal parts of the Affordable Care Act and institute a more laissez faire approach resulted in healthcare stocks advancing 3.4%.⁶ In anticipation of widespread infrastructure construction projects and fewer energy restrictions, industrial company Caterpillar Inc.’s stock skyrocketed 7.7%; investors bought other construction companies’ stocks with similar vigor.⁷ Conversely, “interest-rate sensitive real-estate stocks fell 2.3%,” a result of Trump’s plan assuredly causing high inflation during his term.⁸

            By combining tax cuts-a proposed 6.6% reduction for the country’s highest earners and a 20% reduction in the corporate income tax rate⁹-with fiscal stimulus-primarily infrastructure projects-Trump hopes to ignite a slow-growing economy, and may very well do so; however, these policies will cause inflation to skyrocket, and public debt will likely follow suit. Although Trump’s 10 year $1 trillion infrastructure plan claims to be entirely privately funded, many experts are skeptical that “tax credits totaling 82% of the equity amount” will lure enough investors to cover the full cost-or even come close to it.¹⁰ In the words of Pat Jones, executive director of the International Bridge, Tunnel and Turnpike Association, the plan “strikes me as sort of a concept paper…as opposed to a real plan. These are sort of formulaic numbers that you could come up with to present something that looks like a plan.”¹¹ With public funding-of which there will be less due to less incoming tax revenue-most likely going to be necessary to meet the nation’s infrastructure needs, an increase in public debt seems inevitable under Trump’s plan, even if proposed tax holidays on the repatriation of overseas profits come into effect.¹²

            Overall, “Trump appears likely to enact a fun-house mirror version of what many liberal economists have advocated for years: Keynesian fiscal stimulus,”¹³ thus raising the question of whether the Republican President-elect’s own policies will be challenged by a Republican-dominated Congress. Quiet opposition has already arisen; per the conservative-leaning Tax Foundation, Trump’s plan would increase the budget deficit by $10 trillion in five years, even when factoring in expected faster growth.¹⁴ It seems inevitable that Trump will clash with powerful Tea Party conservatives, such as Ted Cruz, and so-called “budget hawks,” such as Paul Ryan, over increasing debt during his term, which could jeopardize some of the proposed policies that are influencing financial markets most now. In the case that policy, and thus inflation, would not follow Wall Street’s expectations, drastic sell-offs could cause markets to crash down the line.  

¹Nazareth, Rita and Anna-Louise Jackson. “U.S. Stocks Rise, Treasuries Fall as Trump Win Spurs Growth Bets.” Bloomberg, November 8, 2016. Accessed November 10, http://www.bloomberg.com/news/articles/2016-11-08/stocks-higher-with-mexican-peso-as-vote-count-nears-yen-weakens

² Nazareth, Rita and Anna-Louise Jackson. “U.S. Stocks Rise, Treasuries Fall as Trump Win Spurs Growth Bets.”

³Dieterich, Chris. “Elections Have Consequences (For Stocks).” The Wall Street Journal, November 10, 2016. Accessed November 10, http://tk.wsjemail.com/track?t=v&enid=ZWFzPTImbXNpZD0xJmF1aWQ9Jm1pZD02NTQ4NjI4Jm1zZ2lkPTk2ODQwNCZkaWQ9Nzg0OTAwJmVkaWQ9Nzg0OTAwJnNuPTMzOTMzMTA1JmVpZD1sbGl2aW5nc3RvbjIwQGNtYy5lZHUmZWVpZD1sbGl2aW5nc3RvbjIwQGNtYy5lZHUmdWlkPWxsaXZpbmdzdG9uMjBAY21jLmVkdSZyaWQ9MzUyOTgmZXJpZD0zNTI5OCZmbD0wJm12aWQ9MCZ0Z2lkPSZleHRyYT0=&&&15404391&eu=2900&&&http://online.wsj.com/vib

⁴Kuriloff, Aaron and Nick Timiraos. “Dow Climbs to a Record.” The Wall Street Journal, November 11, 2016. Accessed November 11, http://www.wsj.com/articles/dow-climbs-to-a-record-1478822900

⁵Ackerman, Andrew and Monica Langley. “Full Repeal of Dodd-Frank Isn’t Main Focus of Trump Transition.” The Wall Street Journal, November 11, 2016. Accessed November 11, 2016, http://www.wsj.com/articles/full-repeal-of-dodd-frankisnt-main-focus-of-trump-transition-1478882550

⁶Dieterich, Chris. “Elections Have Consequences (For Stocks).”

⁷Rich, Gillian. “Caterpillar Stock Soars on Trump Win on Hope for Coal; GE, Boeing Up.” Investors Business Daily, November 9, 2016. Accessed November 12, http://www.investors.com/news/caterpillar-stock-soars-on-trump-win-on-hope-for-coal-ge-boeing-up/

⁸ Dieterich, Chris. “Elections Have Consequences (For Stocks).”

⁹Irwin, Neil. “The Trump Administration Could Test Whether Deficits Help the Economy.” The New York Times, November 9, 2016. Accessed November 11, http://www.nytimes.com/2016/11/10/upshot/the-trump-administration-could-test-whether-deficits-help-the-economy.html?_r=0

¹⁰Harrison, David. “Donald Trump’s Infrastructure Plan Faces Speed Bumps.” The Wall Street Journal, November 11, 2016. Accessed November 11, 2016, http://www.wsj.com/articles/donald-trumps-infrastructure-plan-faces-speed-bumps-1478884989

¹¹ Irwin, Neil. “The Trump Administration Could Test Whether Deficits Help the Economy.”

¹² Watts, William. “Trump stock-market rally reflects expectations for new era of fiscal stimulus.” Market Watch, November 12, 2016. Accessed November 12, 2016, http://www.marketwatch.com/story/trump-stock-market-rally-signals-new-era-of-huge-government-spending-2016-11-10

¹³ Irwin, Neil. “The Trump Administration Could Test Whether Deficits Help the Economy.”

¹⁴ Irwin, Neil. “The Trump Administration Could Test Whether Deficits Help the Economy.”