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By most indications, the election of Donald Trump was expected to incite a sharp rollback in stock prices. But investor anxiety was tempered by the fact that most pollsters were predicting an easy victory for Hillary Clinton. Everything changed, however, on November 8 when Trump pulled off an incredible upset, and set his sights on the White House.
What happened next surprised most everyone. Instead of tanking as stock futures that night originally indicated, the stock market ricocheted upward with a bang. The Dow rose 257 points on the day following the election, and more than 1400 points by year end. But while the market’s ascent is well documented, a deeper look shows a more complex picture. A new Harvard Kennedy School (HKS) Faculty Research Working Paper reveals how tea-leaf reading about Trump’s future economic policies have had widely disparate impacts upon different business sectors. The paper is co-authored by Richard Zeckhauser, Frank Plumpton Ramsey Professor of Political Economy.
“The ‘Trump Rally’ isn’t that unusual: the overall market tends to rise after elections historically,” the authors write. “What is surprising about the post-election rally is its magnitude, and its sharp difference from the significant decline that most forecasters had predicted if Trump won the election.”
Zeckhauser and co-authors Alexander F. Wagner, an HKS Ph.D., and Alexandre Ziegler conclude that expectations about Trump’s stances on taxation, trade policy, and regulation have been the major drivers in market performance in several significant business sectors.
“Heavy industry (which Trump has promised to resurrect) and financial firms, which he has said he would deregulate, performed well,” they write. “By contrast, healthcare, medical equipment, and pharmaceuticals lost dramatically (presumably due to the expectation that Obamacare would be dismantled or at least significantly altered), as did textile and apparel firms, reflecting their significant dependence on imports, which Trump has vowed to strongly discourage.”
While the markets have continued rising to all-time highs in 2017, Zeckhauser and his co-authors are dubious about making long-term predictions.
“Important elements of the short-term expectations about policies and their effects on company fortunes, whether for the day beyond or the seven weeks beyond Election Day, may well reverse themselves when actual policies take shape,” they posit. “Whatever one’s politics, the initial days of the Trump Presidency lend confidence to one prediction: significant policy surprises, and significant changes in company stock prices, lurk in the near- and not-so-near term future.”
Richard Zeckhauser, Frank Plumpton Ramsey Professor of Political Economy at Harvard Kennedy School