Over the past four years, the stock market has alternated between anxiety and enthusiasm over Trump. In the weeks leading up to the 2016 election, the S&P 500 fell about 4% as Trump climbed in the polls. However, the market embarked on a powerful rally starting the day after the election. For over a year after the election, no interim drop on the S&P or Dow exceeded 5%.
I think the pre-election drop was “fear of fear” that Trump would win and start a trade war, whereas the post-election rally was discounting a boost to corporate profits from tax cuts. Major tax reform was signed into law by Trump in December 2017, which included a significant reduction in the corporate income tax rate from 35% to 21%.
But soon afterward, the stock market got more turbulent. The stimulative effect of the tax cuts had been largely discounted, and the market became anxious in 2018 as Trump imposed tariffs on imports and from China and prompted a trade war.
The major stock indices were cyclically vulnerable to a bear market in 2018. I consider a bear market to have begun in October 2018 and continued all the way to the coronavirus low in March 2020. Though the timing could have been different, this bear market was likely to happen even with no trade war and no pandemic. But within the bear market, downward moves were often prompted by tariff announcements.
For the upcoming election, I don’t know what the short-term market reaction would be to either Trump or Biden winning. But the bigger picture is that stocks are in a bull market that should last until 2024-25, as I wrote about here. Even if Trump were to engage in more trade battles, it would not derail the bull market. Nor would anything realistic from Biden and the Democrats in Congress.
Setting aside what the market thinks of either candidate, the rally since March, and especially since June, is telling us that the market has a view of the near future that is very different than what the mainstream media is telling us. If the mainstream media’s experts are right and public life doesn’t shift toward normalcy until the second half of 2021 (or 2022, or 2023, or who knows when), there is no reason for the market to be rallying now. Basically, if those prognosticators are right, stocks should have returned to a bear market in June. I was writing back in June, in the wake of the sudden market plunge, that a return to a bear market was possible, but the market recovered.
The market sees things turning around much sooner than the media is suggesting. I think that the media’s narrative on COVID is connected to their narratives on other issues in the news this year. It is hard for me to picture anyone who holds the sentiments provoked by the mainstream media voting for Trump.
On one hand, around any major economic turning point, the stock market changes its tune long before the media and public sentiment change their tune. But in this current environment, with skepticism toward the media higher than probably any other time in modern American history, I would not be surprised if the stock market rally turns out to be a sign that contrarian sentiments are quietly spreading through the population in a way that will result in Trump being reelected.
Stock Market Discussion Blog 