Trump Victory Causes Market Shock Then Awe

Investors are getting quite comfortable with the victory of Donald J. Trump. So much so the brief shock to global financial markets is a distant memory.

In case you missed it, when Trump clinched the highest office in the land, Dow futures plunged and gold prices spiked. Now, after nearly a week to digest the news, the Dow is hitting hit fresh records and gold has fallen back into a trading range.

Dr. John Rutledge, former advisor to President Ronald Reagan, now advisor to the Chinese, said something which I think captured an important truth: Behavioral finance shows that human natures makes us tend to overreact to breaking news when we make investment decisions. I think this is doubly true for unexpected news, and triply true for unexpected news which comes from the actions of people from outside of your social world.

For the most part the financial media (though not everybody) had repeated warnings of a dark, dystopian populist vision from fly-over country. Markets had been acting as though former Secretary of State Hillary Clinton would win. People who participate in political futures markets are often the same type of people who participate in financial markets. Perhaps that blind spot was why Predicit and Iowa Electronic Market and the rest got things so wrong.

Just as that group failed to see the Brexit victory, it also failed to see the Trump victory, which represents a similar outlook and dynamic.  Just as in the Brexit vote, markets reacted to the news with what appear in retrospect to have been excessive sell-offs, and then went on to significant gains. Those sharp moves higher came as many on Wall Street, who had never even considered Trump, started to take a closer look at him, his rhetoric and his likely political appointments.

Clinton had spent years massaging the top banks’ top brass. They knew the deal: Public denunciation, private accommodation. That’s why they gave much more money to her than they did to him. George Gilder and Peter Thiel, both Trump supporters and one a Trump advisor, have both decried excess financialization of the economy. When banks get big in a free and open market, that’s one thing. But when they get not only the big bailout of 2008-9, but the on-going bailout of near-zero interest policy, and an oligopoly of currency hedging in a world of fluctuating paper currencies, than that’s more crony than capitalism.

Big money’s Pavlovian response at the prospect of a Trump victory was to sell, sell, sell. But they’re smart and adaptable group of people. Peaceful (well except for a few rent-a-riots) transition of power? Check. Mike Pence as head of transition team? Check. Peter Thiel as close advisor? Check!

Yes, there are still dangers, for example a trade war. But so far, investors, now that they’ve had a chance to take a closer look, like what they see.

Jerry Bowyer is the President of Bowyer Research. He has some more thoughts about Trump and Portfolio design at his blog: