The market is pricing in a perfect execution of Donald Trump’s positive plans and ignoring any possible negative outcomes despite his inconsistent behavior. Many are expecting a return of the Reagan years without factoring in the differences between the situation Ronald Reagan inherited relative to the situation we are in now (click here for NDR’s comparison of the two environments.)
In addition to this, investors seem to have forgotten the early problems Republicans ran into when taking over for a Democrat. Bespoke posted this chart on Twitter earlier this week throwing a bit of cold water on the rally:
I’ve been saying the past few weeks my fear is we may see the opposite of what we saw after President Obama was first elected in 2008. The market was already down and it continued to fall out of fears he would make good on his campaign promises that were very anti-business and anti-wealth. After his inauguration when he attempted to start implementing his plans he ran into a brick wall and soon realized he’d be better off if he backed down on the rhetoric. The market bottomed shortly thereafter and rarely looked back.
Granted there have only been four occasions since 1928 when a Republican challenger took over from a Democrat, but all 4 have had negative outcomes the following year. In 3 of the 4 the market rallied nicely after the election. The only year it did not was in 2000 when the election was not officially decided until December. The more growth the market prices in, the more likely it will be disappointed when the reality of the enormous battle President Trump will be facing sets in.
[Yes I know this is not technically a “chart”, but it was the most interesting data point I saw this week.]