The stock market has surged to record highs this week after Donald Trump was elected to a second term as president. On Wednesday, the Dow Jones had its best day in two years. The S&P 500 and Nasdaq also reached new heights.
John Bai, a finance professor, says the market rally is partly due to investors reacting to the quick election result. It is also a response to Trump’s proposed economic policies. “The number one rule in the stock market is that the stock market doesn’t like uncertainty,” Bai explains.
“But it does like the resolution of uncertainty.”
In 2016, there was a similar reaction on election night. Dow Jones Futures initially dropped by around 700 points due to uncertainty. This was because of a late shift toward Trump in key states, which went against expectations of a Hillary Clinton victory.
However, the stock market bounced back sharply the next day once the outcome was clear. This time, it was obvious early on election night that Trump was doing well. He carried this momentum into the next morning.
“If anything, Donald Trump’s margin started to take off as later votes poured in,” Bai says. Many observers were surprised by this decisive victory. They had anticipated long legal challenges and delays.
Highs after election boost optimism
The quick resolution significantly boosted investor confidence. Another factor was the expectation that Trump’s policies would be similar to those from his first term.
This includes pro-growth initiatives, corporate tax cuts, and a push for a market-driven economy with less government involvement. Trump’s clear win and expected economic strategies led to the record market highs. However, it’s important to consider potential downsides, such as higher costs for households due to likely tariffs.
This was a hallmark of Trump’s first term, which saw a trade war with China, a global pandemic, and a stock market with wild swings. Bai says the question now is about the long-term effects of these policies. For new investors, now might be a good time to start investing in the stock market.
“If you are inexperienced and want to get in the game, the best bet is to go with overall market indices: the S&P 500, Nasdaq,” Bai advises. He suggests exchange-traded funds as a way to diversify portfolios. “The United States is still the leading technological engine,” Bai says.
“If policies shift back to support domestic growth, consumers could benefit, depending on how prices and the market evolve. Corporate tax reductions and deregulation are anticipated to boost corporate profits over the next four years.”
Given this post-election rally, many potential investors are asking if now is the time to invest. Bai’s advice is simple: stick with market indices unless you’re experienced enough to handle the risks of individual stocks.
For now, investors are riding the wave of optimism following the certainty of the election results. They are also anticipating favorable economic policies under Trump’s administration.
