In the lead up to Tuesday’s election, I am trying to recall if I heard or read a market participant or pundit who accurately predicted a stock market rally in the event of a Trump victory. I am sure there were some, but I suspect they were fairly sheepish in their pre-game proclamations, just as it appears many voters were with pollsters. Pre-election market palpitations seemed to tip investors hands as to who they would like to see in the White House come January 20th. But in hindsight, as we mentioned numerous times, a large factor was markets wanting a “clean kill”. If we were in recount mode right now the market would probably be down significantly.
I want to make two points about the markets initial reaction resulting in a massive V reversal in the wee hours of Wednesday morning, and the arm chair quarterbacking since.
First things first. The S&P 500 (SPX) futures fell 5% Tuesday evening when it became clear that Trump had a good shot of winning:
And then they miraculously lifted off and had completely recovered in the early part of Wednesday’s trading. What that initial reaction may have reflected was both worries about Trump’s protectionism rhetoric (tearing up trade deals, tariffs etc.) but also the potential for a dragged out conclusion. The futures dropped at a point where Florida was still a toss-up and suddenly results from Michigan started coming. Not many people had those upper midwest states on their too close to call lists, even though the campaigns did in the last week, with the Democrats suddenly scrambling surrogates like President Obama to Michigan.
As far as that V reversal, Trump supporter and billionaire investor Carl Icahn told Bloomberg that he had put cash to work in the futures market:
“I would have tried to put a lot more to work, but I couldn’t put more than about $1 billion to work, and then the market got away. But I’m still happy about it,’’ Icahn said. “The S&P was so liquid — it was unbelievably liquid — the world was going nuts. Last night it was amazing, the world was going into a panic with no reason.”
Icahn had been in Trump’s corner nearly from the beginning, so props to him for putting his money where his mouth had been.
Now we seem to have a new found universal enthusiasm on Wall Street about the economic prospects of a Trump administration. Regular readers know that despite predicting a Clinton win, our trading reflected a more nuanced and less binary approach. For instance, it had been our view that no matter the outcome, that sectors like Biotech/Pharma that had been hit so hard would likely rally no matter the outcome (Biowreck Check). Aside from healthcare stocks, bank stocks have been the best performing since Tuesday’s close. On Wednesday’s Fast Money on CNBC we had the pleasure to have Cantor Fitzgerald’s CEO Howard Lutnick on. He seemed over-joyed by the prospect of financial regulation being rolled back under Trump:
So here’s where things are getting weird. Trump ran as a political outsider, railing against the Beltway and Wall Street establishment. But despite all those ads about his opponent being too close to Wall Street, he was the one that was going to de-regulate Wall Street the entire time.
I obviously have no idea what gets tweaked and what doesn’t, but markets are reacting as if every business friendly part of Trump’s platform will be enacted, (lifting Wall Street, Oil and Gas, environmental and healthcare regulations) while virtually none of the populist ones do (tariffs etc.).
This will be an interesting thing to watch. The populist message that Trump ran on is very difficult to pull off if the two houses of Congress in your own party resist those aspects. And the key to seeing if the candidate himself ever planned on following through will be a story told through his appointments. Yesterday, Jamie Dimon’s name was floated for Treasury Secretary. That’s not exactly sticking it to Wall Street.
Lastly, I take massive issue (and I think I made it pretty clear) with the notion that in some way banks have been oppressed by our government since 2008. Lutnick stated that rather than “shooting them” as the government did after 2008, they should have just “given them a spanking”. It’s Lutnick’s view that deregulation of banks will be positive for our economy as they will start to lend again.
If U.S. banks were shot in 2008/09, the wounds were self-inflicted. And President Obama’s quote in private meetings with Wall Street CEO’s who marched on Washington to protest new regulations is important in hindsight. He told them:
I’m the only thing between you and the pitchforks.
The idea in DC after TARP was that regulation of Wall Street was not only practical but also the smart thing politically for a country that had just been rocked by the biggest financial crisis since the Great Depression. At the time there was a thought amongst some economists that maybe the government should have just skipped the middle man and bailed out the home-owners. But remember political opposition to the President’s crisis policies in the form of the Tea Party famously launched not as a protest against Wall Street bailouts, but as a famous rant on CNBC against a rather minor mortgage relief bill for those homeowners under-water after the collapse.
So maybe the way Dodd Frank somewhat neutered Wall Street was a mistake. It’s true it’s probably dialed back some of the financial innovation possible on Wall Street. But that was kinda the point. And now the party that made that call in the wake of the crisis just got punished, in large part ironically, for being labeled as being too close to Wall Street.
Deregulation will probably give a bit of a jump start in lending, and the prospect has certainly given a big boost to the bank stocks themselves. But do remember it’s often a short term high with painful hangovers, as rounds of banking deregulation historically are followed by banking crises about 5-10 years later. Some relatively small, some REALLY BIG … with confusing political ramifications that last a decade.