Post-Election Stock Market Prognosis
By: Jonathan Wagner
2016 has certainly been filled with unpredictable twists and turns. The Cubs ended a 108-year drought to win their elusive third World Series championship. The United Kingdom surprisingly voted to leave the European Union. But perhaps the most surprising results occurred on the evening of November 8th as an anxious nation awaited the results of the U.S. presidential election.
Despite a nearly consensus prognosis from the experts, Donald Trump prevailed as the victor. So, while many questions remain unanswered as to what a Trump presidency may entail, perhaps one of the most pressing concerns centers upon the stock market’s performance.
The Resilient Stock Market
As you may well know, the stock market typically reacts negatively to uncertainty. The immediate aftermath of the election saw stocks plummet by nearly 5% only to rebound strongly. In fact, trading closed on Wednesday, November 9th up by just over 1%. So, investors should feel optimistic concerning the stock market’s performance in the short term and even more optimistic concerning the long-term growth of the stock market and broader economy.
The stock market is not immune to sharp declines and steep increases, but the stock market is far more resilient than many give it credit for. Over the last 90 years, the S&P 500 has increased from 244 (in 1927) to 2,198.61 (in November 2016). If you are planning on long-term investing, it is reasonable to expect an average annual return over a 10-year-plus time span to approach 7%.
So, in summary, relax! The economy should continue to grow at a rate of around 2-3% annually, and over time, the market should average around a 7% annual return.
Why the Stock Market Is Reacting Favorably to President-Elect Trump
Perhaps the prognosticators shouldn’t be shocked to see the market responding favorably to the news of a Trump presidency. Despite the relative uncertainty surrounding a Trump presidency, many of Trump’s taxation policies would provide an infusion into the economy. The stock market is not only responding to the Trump presidency, though. There are multiple facets to take into account. Among these factors are:
- The election of the unified Republican government (Presidency, House of Representatives, and Senate)
- Increased job growth
- Relative economic stability for the past year
The policy with the greatest propensity for real economic growth is Trump’s plan to cut the corporate tax rate in half from upward of 30% to 15%. This figures to create quite an infusion to the economy.
Among Trump’s largest proposed reductions is his plan to reduce the taxes on repatriated earnings from 35% down to 10%. This would provide a huge capital infusion into the U.S. economy and ensure strong ensuing growth.
Trump’s call for deregulation is also among the most significant of his market-friendly policies. President Obama has been a friend to corporate America on some fronts as demonstrated when he led the charge for the bailout of the U.S. auto industry. However, Obama’s policies are more in line with Democratic loyalties, which often favor the protection of consumers and the environment over corporate interests.
Donald Trump seems to adopt a standard Republican economic policy. It begins with taxation reductions for corporations and the wealthy that will “trickle down” to the middle and lower classes.
Stocks to Watch With Trump Presidency and Republican Congress
Stocks to buy following the election of Trump and the unified Republican Congress would be companies that benefit most from Trump’s proposed policies. For instance, Trump touted national security, border control, and immigration as paramount issues during his campaign. Therefore, it would make to sense to invest in government contractors working with the military, federal and state prisons, border control, or immigration. Examples of these companies would be:
- GEO Group
- G4S Secure Solutions
- Correction Corporation of America (CCA)
Trump also touted plans to invest heavily in improving the country’s infrastructure. This plan would work to modernize and improve roadways, bridges, airports, and seaports. Investing in large construction companies and construction materials would also be a wise investment. With the online trading platform, Motif, you can easily select industries to invest in. For instance, Motif has a “Road Construction” motif that is composed of 11 stocks associated with road construction.
There are numerous industries that could see a boost in a Trump presidency and a Republican Congress. These fields would likely benefit from decreased regulation and decreased corporate tax burdens. Some sectors to consider would be health care, financial services, and energy.
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About Jonathan Wagner