MW ?Trump's win sparked stocks for this surprising reason - and it's fueling the market rally

By Mark Hulbert

Investors hate uncertainty; the U.S. election result was quick and orderly.

If the stock market hates uncertainty, then why has it rallied since Election Day? After all, investors can't be sure how President-Elect Donald Trump's policies will actually turn out, while it's fair to say that had U.S. Vice President Kamala Harris won the election, investors could have reasonably expected continuity -and less uncertainty.

The stock market doesn't see it that way Since Election Day, the Dow Jones Industrial Average DJIA is up 4.9%. Meanwhile, the Russell 2000 RUT index of small- and midcap stocks, which are especially sensitive to economic uncertainty, has more than doubled the Dow's return, gaining 10.1%.

To gain insight into the market's powerful election response, I reached out to three finance professors who have extensively researched the relationship between the stock market and uncertainty about economic policies: Scott Baker of Northwestern University, and Nicholas Bloom and Steven Davis of Stanford University. From their perspective, the stock market's rally since Election Day is not as irrational as it might appear.

That's because the typical pattern is for uncertainty about economic policy to decline after presidential elections. So rather than being unusual, less uncertainty and rising stock prices are actually what you'd expect.

That makes sense. Contrast where we stand today with some of the widely anticipated scenarios in advance of the Nov. 5 election. Most expected that it would take days, if not weeks, to count all the votes and determine a winner. Many worried that there would be widespread violence. So the fact that the election's outcome was orderly and resolved by the next morning reduces uncertainty in a major way.

Furthermore, last week's market rally is consistent with the historical pattern, Davis said in an email. In the U.S., since 1985, for example, an Economic Policy Uncertainty index $(EPU)$ that the professors constructed was, on average, 13.5% higher in October of presidential-election years than in the other months of the four-year presidential term.

"I don't see a big puzzle here," Davis concluded - unless you think that a Trump presidency would lead to such a big increase in uncertainty that it would "overwhelm the usual uncertainty-reduction effects of elections."

Bloom added that "this election has resolved a lot of uncertainty, as we now know clearly what the next administration will be." To be sure, he continued, "Uncertainty could easily pick up again ... in January as new policies are rolled out if they are radical or controversial. But for now ... [the] markets are booming and uncertainty appears low."

Adding to the boost the market is getting from declining uncertainty are the more usual seasonal factors. Holiday salary bonuses on Wall Street will likely be larger than average this year, given the stock market's strong year-to-date performance. And mutual-fund managers, gunning for a high ranking in the year-end performance sweepstakes, are fueling the fire.

These seasonal factors fall away in January, just as economic [policy uncertainty may increase as Trump takes office. That's when the stock market may begin to struggle, as would be normal in the weeks following Inauguration Day. Until then, the stock market could be stronger than many expect.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

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-Mark Hulbert

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November 12, 2024 07:35 ET (12:35 GMT)

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