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Sustaining the Trump Rally

LONDON – Donald Trump’s victory in the United States’ presidential election surprised most of the world. But the president-elect is not finished defying expectations. Contrary to the predictions of many experts, stock markets have rallied strongly since his victory, with the three major US indices reaching record highs while the dollar has soared. Explaining these unexpected responses could provide a glimpse of what the next few months have in store for markets.

Before the election, most analysts predicted that a Trump win would trigger a large stock-market selloff and a rush into low-risk government bonds. And, indeed, when the results began rolling in, that is what happened, beginning with Trump’s dramatic victory in Florida and gaining traction as his lead in the Electoral College grew. By the time that lead appeared insurmountable, the Dow Jones index of US stocks had fallen by 800 points, and the broader S&P 500 was “limit down.” Moreover, the dollar began to slide, and a flight to quality in US Treasury markets caused bond yields to plummet.

But market pessimism did not last long. Soon after the president-elect delivered his acceptance speech in New York, at nearly 3 a.m. Eastern Standard Time, stocks began to rally – and have ever since, helping to boost risk assets around the world. With capital pouring into the US, the dollar strengthened to levels not seen for some 13 years.

In addition, many investors have abandoned the safety of government bonds, triggering a spike in interest rates even more pronounced than during the 2013 “taper tantrum” that followed former US Federal Reserve Chair Ben Bernanke’s statement that the Fed intended to wind down its liquidity support. Markets are now all but certain that the Fed will pursue an interest-rate hike next month.