Every major political change impacts the economy. The presidential election cycle is no exception. In fact, the election of a new president is one of the biggest causes of shifts in the Dow Jones Industrial Average. (The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded. In other words, it’s a way to average the entire market and see if it’s going up or down over time.) Aside from a brief but significant drop in the market the week of the election, the market has consistent gone up since the election of President Donald J Trump. In fact, the Dow Jones is spiking records. What does this mean for Americans?
With the Dow Jones spiking record highs, investors are celebrating. For some, though, the records are cause for concern. The US economy hasn’t actually grown at a pace commensurate with the growth of the stock market. That means that the stock market will likely correct at some point, which will mean losses for the unprepared.
Fear vs Greed Index
CNNMoney’s Fear vs Greed index puts the current economy in the Greed category. Simply put, as a general rule, investors are trading based on greed. With interest rates increasing and the Dow Jones Industrial Average climbing, investors are excited to make money and continue dumping more into the market. While the Fear Vs Greed index doesn’t provide any sort of forecast, it does show the current mood of investors.
Trump’s post-election agenda includes plans to deregulate banking, tax reforms, and stimulus spending. These plans serve to benefit most investors, so rather than selling and hiding cash under their mattresses, investors are flooding the market with their cash, banking on Trump’s financial promises coming to fruition. Trump’s presidency has infused the financial sector with hope, thus bolstering the US stock market.
Long Term Outlook
One month into President Trump’s presidency, investors are still riding on the hopes of fiscal change. If, within a few months, his plans aren’t passed, the economy will likely slump. Hope can only maintain the market for so long before fear takes over and the market drops.
If President Trump succeeds in deregulating the banking industry, pundits forecast another bubble in the financial sector, which could mean great short- term gains for many, potentially followed by great losses.
What to Do
Despite a couple of days of losses, the Dow Jones is still at an all time high. Investors anticipating future growth are investing in areas they expect to grow. If deregulation happens, then we can expect to see stocks prices across the banking industry increase. For investors who anticipate a bubble, then they’re likely taking short positions on stocks in the banking industry.
While the stock market always increases over the long term, a period of rapid growth is a great time to evaluate whether your holdings are diversified enough in case of a sharp correction.