Wall Street Has Convinced Itself That Trump Won't Be Bad (For Now)

Investors are hoping he'll pursue policies that provide short-term stimulus.

US stocks were supposed to fall. Stocks in Japan crashed overnight, and European markets opened lower. Futures markets for the S&P 500 hit their limit for an overnight fall.

But, alas, after Donald Trump won the election, the S&P 500 rose over 1% and the Dow Jones Industrial Average finished the day up up 255 points, or 1.4%.

Despite many economists' and analysts' predictions that a Trump White House would mean a devastating trade war and a gloom of uncertainty over companies, investors, and countries, some Wall Street sages now are saying that Trump is most likely to pursue policies that could provide short-term stimulus — tax cuts and lots of infrastructure spending — rather than bogging himself down in massive, immediate immigration restrictions and trade wars.

"We see this election result as less about sides taken on such divisive issues and rather a 'make growth priority one' mandate; something investors should welcome," David Bianco, a Deutsche Bank strategist, wrote in a note today.

"Builders build," Peter Tchir, a managing director at Brean Capital, told BuzzFeed News. "He’ll revert back to what he knows best: borrowing money and building."

Of course, the Trump of Wall Street's collective hope and dreams — a Trump that becomes less volatile and inflammatory and more "presidential" — could just be nothing more than an optimistic bet.

"I think his victory speech yesterday was a sign that president-elect Trump might be different," Tchir said. The president-elect struck a conciliatory tone in his address.

Impact on Treasuries

The possibility of a high-spending, low-tax, and high-debt White House has already taken hold over financial markets, leading to a huge reversal in prices of US Treasuries, which tumbled Wednesday as stocks rose.

"The stimulative fiscal initiatives of a Trump administration, along with growth that may be delivered from other policies, may lead to economic expansion conducive to equities," the investment firm Janus said today. "While an increase in fiscal spending could help accelerate growth, it would also exacerbate the already challenged US fiscal position and limit the decline in Treasury yields."

In the wee hours Wednesday morning, as overseas markets shot down and a Trump victory became more inevitable, yields on 10-year treasuries, dove down to 1.72%. This is a typical repose to investors freaking out over a surprising event or economic turmoil: they pile into US Treasury debt, driving the price up and yields down.

But since then, yields have peaked up over 2% for the first time since January. If Trump has to borrow money to cut taxes and spend on infrastructure, it would require flooding the market with government debt to fund it, bringing down prices and raising yields.

An opportunity for Republican policymakers

Analysts are also rediscovering traditional investor enthusiasm for Republican policymaking, which promises at least a pause on new regulations, if not completely getting rid of many of them.

"Following several years of gridlock inside the Beltway, the potential now exists for a number of legislative initiatives to be passed. Examples would include fiscal stimulus/infrastructure spending, corporate tax reform, reducing regulation, and addressing rising health care costs," David Kostin, an analyst at Goldman Sachs wrote in a note.

Wall Street types are also counting on a Republican Congress to lead him to more traditional Republican policy rather than immediately deporting immigrants and ripping up trade deals.

"Is a presidential Trump more behaved? As long as he leaves things like the wall and his more extreme views off the table, it's the right response," Tchir said.

"He won't want to preside over an immediate recession in the United States, he's not particularly wedded to specifics of many police proposals. In fact, he seems to welcome compromise and modifying his position," David Kelly, the chief global strategist for JPMorgan Asset Management, said on a call with clients.

Including financial deregulation

One position that many investors don't want to see modified is Trump's promise to rip up Dodd-Frank, the Obama administration's effort at financial reform. JPMorgan, Bank of America, and Wells Fargo are all up by at least 4.5% in trading today thanks to the promise of lighter regulations and higher interest rates (that come with bigger deficits and maybe the Fed hiking the interest rate it controls) that would help them raise the rates at which they lend to borrowers.

"The Financial sector trades at a discount relative to the market and shares would benefit from...reduced regulatory oversight," Kostin wrote.

The deregulatory enthusiasm spread past the large banks to their brokerage and financial advisory cousins. The shares of several brokerages — LPL Financial, Raymond James, and Ameriprise Financial — finished up 6% to 13% driven by optimism that a recent rule imposed by the Department of Labor that requires financial advisors to make recommendations to clients in retirement plans based on the best interest of the client.

During the campaign, the fund manager Anthony Scaramucci, one of Trump's top fundraisers, criticized the rule, even go so far to say "we're going to repeal it."

"We believe that a Trump White House would either reverse or significantly curtail the effort," analysts at Compass Point said in a note Wednesday morning.

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