On Tuesday, Bridgewater Associates—the world's largest hedge fund—told its clients that if Donald Trump won, the Dow Jones industrial average would plunge 10%, or just over 1,900 points.
And they weren't alone. Citigroup predicted a 3%-to-5% S&P 500 drop if Trump won. And the bank's strategists said that drop would happen immediately—like today. Goldman Sachs also predicted a big drop in the stock market, and a plunge in the Mexican peso by about 25%. And there was a parade of other market experts and stock seers who predicted the same thing.
Instead, markets staged a huge turnaround Wednesday morning, after dropping the night before in after hours trading, when trading opened in New York. The Dow Jones Industrial Average is up just over 150 points, or about 2025 points higher than where Bridgewater said stocks would be. And Goldman, it has a new note out to clients predicting what will happen now that Trump has won. Their new conclusion: Not much.
So why did market watchers get the Trump call so wrong? The often repeated word as to why stocks would plunge if Trump were elected president was "uncertainty." And when it comes to markets, that's a scary word. In fact, ever since the financial crisis when the thing few ever predicted would happen, happened—the black swan—the possibility of uncertainties became more cringeworthy than ever.
But while Trump brings new uncertainties, his win also answers one of the biggest uncertainties facing the market, i.e. who will be the next president.
What's more, Trump's policies aren't as unpredictable as people where making out, and if taken seriously, they could actually be good for the stock market. Trump has said he wants to cut taxes for everyone, but particularly the wealthy and corporations. The last two cuts could be very good for the stock market. Lower taxes for wealthy people should mean more money flowing into the stock market. And lower taxes for corporations should mean higher corporate profits, which should boost the value of stocks.
Another big fact that seemed to be missing from the market forecasters' crystal balls was the Federal Reserve. The U.S. central bank has been itching to raise interest rates, and the market was forecasting as of 5 p.m. last night that there was an 82% chance that they would at their December meeting. Generally, rising interests are bad for stocks.
But now an interest rate hike could be off the table, given that the Fed is likely to think that Trump's policies will add risk to the U.S. economy and global markets on their own. What's more, there's always a lot of uncertainty around interest rate hikes, especially these days given how long it has been since the last sustained Fed tightening cycle. So there another big uncertainty that Trump removed, at least for now.
The big wild card is what would Trump's tariff policies mean for large Fortune 500 companies. Those huge multinational companies get a large and growing portion of their earnings overseas. So that could be a problem. If Trump declares a trade war with China for instance, they could slap tariffs on our goods. But we import far more goods from say China and others than we export to them. So the affect, even if we get into a trade war, could be muted.
On top of that, Trump's proposed budget could add a projected $5.7 trillion to the deficit over the next decade. But with interest rates still near all-time lows, and only moving up slightly on the Trump news, it seems the market still thinks there is appetite for all that debt, or that the U.S. economy will grow fast enough to justify it.
But here's the big point: We weren't always as worried about uncertainties as we've been recently. There are always uncertainties. The future is unknowable. In fact, it's the role of markets to price risk. Collectively, investors can weigh the likely outcomes and come to the best prices. Our faith in market was shaken during the financial crisis, but perhaps we are getting that back again.
One more thought: Another thing we often hear is that 'markets like Washington gridlock'. But after at least eight years of it, perhaps the market has had its full of the do-nothing Washington. Or maybe the market thinks, correctly or not, when Republicans are in power, a lack of gridlock could be a good thing.
Either way, somehow eight years after the financial crisis, with the economy on the best footing it has been in years, the uncertainty that is out there over a Trump Presidency just doesn't seem so bad, at least for one day.