What economists think about the post-election stock rally

Jan 19, 2017

Sections Economics Finance

In the run-up to the United States presidential election, investors and market analysts tried to anticipate how a win by either of the major-party candidates would affect equities markets. Some—including those at the world’s largest hedge fund, Bridgewater Associates—predicted a victory by Donald Trump could wreak havoc on the markets, and those predictions appeared prescient on election night, when the Dow Jones industrial average dropped 5 percent in after-hours trading as Trump’s victory became increasingly certain.

However, the market’s decline was short-lived. Between election day and January 18, the Dow and Nasdaq composite index ticked up 8 and 7 percent, respectively. But while we’ve seen markets’ short-term reaction to Trump’s win, a question remains: why have the markets rallied? Are expectations about Trump’s policies contributing to higher stock prices?

Chicago Booth’s Initiative on Global Markets put that question to its Economic Experts Panel. The majority of the panel agrees that share prices are up in part because Trump’s policies seem likely to increase corporate profits. Only 10 percent of panelists, however, feel the stock market’s gains have come because Trump’s policies are likely to speed up economic growth in the US overall.

Caroline Hoxby, Stanford
“Pure animal spirits would seem to be the best explanation.”
Response: No opinion

Oliver Hart, Harvard
“People, probably correctly, expect lower corporate taxes and fewer regulations. Go figure.”
Response: Strongly agree

Steve Kaplan, Chicago Booth
“Enthusiasm driven by the expectation of regulatory relief and concomitant investment, growth, and profits.”
Response: Agree

 

Richard Schmalensee, MIT
“Share prices depend on profits, not GDP. Tax cuts plus more spending may increase GDP in the short run, but profits are what matter.”
Response: Uncertain

William Nordhaus, Yale
“Here, the Keynesian impact of tax cuts on output is partly offset by likely higher real interest rates.”
Response: Agree

Richard Thaler, Chicago Booth
“It is hard to know what Trump’s policies will be since he contradicts himself repeatedly, but he shows no signs of understanding economics.”
Response: Disagree