The stock market surged to record highs this week after Donald Trump’s decisive victory in the presidential election. On Wednesday, the Dow Jones had its best day in two years, while the S&P 500 and Nasdaq also reached new heights. John Bai, a finance professor at Northeastern University, says the post-election exuberance is partly due to investors’ reaction to a swift election result and partly 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 says. “But it does like the removal of uncertainty.”
In 2016, when Trump won his first term, the stock market initially dropped on election night but rose the next day. Bai explains that this is generally what happens after an election, as investors grapple with a new reality and start to analyze the policies that come with the winning president.
This time, it was clear almost from the start that Trump was performing well, and his decisive victory came as a shock to many observers who were bracing for legal challenges and delays. Bai says this swift result was one factor that buoyed investors. Another factor was the expectation that Trump’s policies would be similar to those from his first term.
Stock market response to Trump presidency
The market sees Trump as “pro-growth, cut corporate tax rates, and encourage a larger market-driven economy,” with more restraints on the federal government, according to Bai. Trump has signaled that he would put Elon Musk in charge of reining in government waste.
However, his tariff plan could raise costs for households, as it did during his first term when he imposed hefty tariffs on foreign goods. Bai notes that Trump’s first term saw a trade war with China, a global pandemic, and a stock market characterized by “wild swings and overreaction.” He says the question now is the long-term impact of policies yet to be unveiled, once the short-term excitement settles down. For new investors, Bai advises investing in broader market indices like the S&P 500 and Nasdaq, which is generally safer.
He also suggests adding exchange-traded funds to diversify investments. “If anything, the United States is still the leading technological engine, and if policies are going to be shifted back to the U.S., I think consumers reap the benefits, depending on the price level and how things play out,” Bai says. “But even from a company’s perspective, just the corporate tax reduction plan and deregulation alone are going to result in corporate profits going up over the next four years.
This is the anticipation,” he concludes.
