Trump Wins and Investors Follow the Herd

Here comes President Donald J. Trump.

Now that’s something you don’t see every day.

By now, the world knows all about the remarkable election results. To say that most so-called “experts” were wrong about the outcome is to be as generous as one can possibly be.

This is especially true of so many so-called market experts, most of whom had predicted a Hillary Clinton victory and probably invested accordingly.

We know that because of how the markets reacted on election night, especially as it was growing increasingly clear that Donald Trump could actually become the 45th U.S. president. I was watching the futures markets that night, and at one point the Dow futures were down more than 800 points. That shows traders were betting on markets falling hard on the Trump win.

Well, once again, the experts were wrong. On Wednesday, stocks opened somewhat erratically. But by mid-morning, there was a decided bid higher in the markets. That bid was driven by money flows into what I call “Trump-win” sectors. Those sectors are the ones likely to do well because of President Trump’s policies.

This rotation was even more pronounced given the fact that Republicans hold control of both the House and the Senate. The all-Republican executive and legislative branches mean that President Trump will be able to pass legislation he and the Republicans in Congress want, and that means he can enact proposals such as more infrastructure spending, corporate and personal tax cuts, removal of onerous regulations on business, increased defense spending, etc.

Wall Street liked that possibility, and on Thursday the big rally continued. The chart here of the Dow over the past five days tells you all you need to know about the initial feelings toward the election results.

This outcome was the exact opposite of what many thought would happen.

Last week, I read multiple research reports predicting a Clinton victory, and a rebound in the markets once certainty returned to Wall Street. These same reports warned that if Trump somehow pulled off a miracle upset win, then stocks would plunge, gold would surge and bond prices would spike.

The reality here could not have been more wrong.

Stocks surged after Trump’s win, gold prices fell and bond yields spiked. So much for the conventional wisdom.

One reason the markets have done so well over the past several days is due to the phenomenon of behavioral economics. This is when a group of actors (such as investors) behave along with one another and thereby fuel the action and/or result in a particular direction.

In this case, investors ran to sectors such as financials, biotech, infrastructure, defense and other sectors. While I understand this happens all the time on Wall Street, I caution you not to fall into this trap. What you don’t want to do is chase sectors, so I recommend not trying to ride the gains of the past two days in biotech, financials and other sectors on this immediate post-Trump-win boost.

Sure, if you were lucky enough to have owned these sectors before their big, respective moves, then congratulations. But if you try to pile in now, well, that’s likely to result in something I call “bad trade location,” and I recommend you avoid putting yourself in that position.

Of course, the Trump administration and the Republican Congress will mean new opportunities for investors. But if you succumb to the temptation to jump on a short-term buying wave, you just might see that wave fold in on you quicker than you think.

If you’d like to get in on the uptrends that are just starting to break out and avoid those that are destined to bring you to a bad trade location, then I invite you to subscribe to my Successful ETF Investing advisory service, today.

Wisdom for Trump

“I count him braver who overcomes his desires than him who conquers his enemies; for the hardest victory is over self.”

— Aristotle

It might be presumptuous of me to offer advice to the president-elect, but the wisdom here from Aristotle applies to all humans. In a job that will no doubt test the limits of human will, it is wise to have control over your own desires and impulses. If you can achieve this, the country is likely to be the real victor.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Click here to ask Doug.

In case you missed it, I encourage you to read my e-letter column from last week about what I felt the best way to invest after the election would be.