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Should You Invest in the Stock Market During a Trump Administration?

Last week the stock market was setting all-time highs as the Dow Jones Industrial Average crossed 20,000 for the first time. Since the close of trading on Nov. 4th, the market has raced ahead by over 2,200 points to where it stands today. Of course it remains to be seen whether this market can sustain the momentum or not under the leadership of our new President, Donald Trump.

stock marketJust typing that last sentence seems surreal, for people in both parties. We hardly could have imagined this two years ago. Whatever your political views, you have to give him credit for doing what no one thought possible. It’s something we haven’t seen in the history of our government.

President Trump is still an unknown quantity. By his own words, he is new to the political scene. We do not fully know how he will proceed with matters of national policy or foreign affairs because he doesn’t have a long track record for us to parse through. But we do know one thing about him. President Trump is a businessman through and through. He has done well for his family and the thousands of people he has employed.

Will this expertise be good for businesses across the country though? And will it translate into upward momentum in the stock market? Should you invest in the market during the Trump presidency, be it four or eight years? Let’s try to find out.

What the Markets Hate

There are few things the markets hate. In general, these issues drive stock prices down in the near term and affect the value of investor’s portfolios. They include (but are not limited to):

1) War/World Conflict. Investors do not like it when countries clash with one another. In the near term an announcement of war would immediately drive stock prices down. The uncertainty of the outcome pushes investors to the sidelines and into a more secure asset like cash.

The affects of a war are temporary as markets typically rebounded after the initial shock or after the war is over. But in the short run, war would cause a decrease in the stock market.

2) Government Regulation and Taxes. We all expect the government to have some oversight into the dealings of companies. We don’t want them doing things that are illegal, that would harm people or destroy the environment. Likewise, we expect them to pay their fair share of taxes just like the rest of us.

But burdensome government oversight and high tax rates stifle businesses from growth. The effects include production and transportation of goods, as well as research and development. Ultimately, intense regulations force businesses to contract and discourages them from hiring more workers.

3) Lower Company Earnings. The more companies earn the more investors can get excited about owning those companies. On the flip side, floundering company earnings will bring out the sellers and decrease the price of stocks. No one wants to be holding a company in their portfolio that is not living up to growth expectations.

4) General Uncertainty. As a catch all category, the stock market hates uncertainty. Stocks can languish for months to years while investors wait to “see what happens” with whatever they are worried about. For many sitting on the sidelines, hording cash is preferable to putting their money at risk not knowing what is coming.

(This may be one of the reasons stocks are up so much since the election…investors gained clarity on who would be President.)

How Does President Trump Stack Up?

So how President Trump measure up in the four categories I mentioned? Let’s take them one at a time.

1) War/World Conflict. Sure there are places in the world where there is conflict or the potential for conflict (i.e. the Middle East, N. Korea). However, that has always been the case. The closest we are to a war is our battle with the radical extremist group ISIS. But I don’t classify that under the traditional definition of war like we have seen throughout history.

With no threat of a major global war on the horizon, this is something investors shouldn’t worry too much about. There will always be conflict and President Trump and his staff will have to deal with it the best they can.

2) Government Regulation and Taxes. This is where I think President Trump could really hit a home run. He understands the burden regulations and taxes put on industry because he has been a businessman all his life. In fact, he has already begun to outline ways to decrease regulation and taxes on companies in the hopes of spurring economic growth.

I see his policies as a big win for small and large companies across the country. It’s also potentially a huge win for the American worker. Many of them have been left out in the cold for the past 8 years as businesses have cut expansion and hiring.

3) Lower Company Earnings. The reduction of regulations and taxes on businesses would ultimately help companies produce more earnings. In turn, this would attract investors who would buy stocks and drive up prices.

With more money at their disposal, the American consumer would pour that back into the economy by purchasing goods and services. Companies would then continue to make more and the cycle would continue.

4) General Uncertainty. This is a wild card in the equation as uncertainty can’t always be removed. Where President Trump can help is following through on his campaign promises. When people see his actions are consistent with his words, they will begin to trust him and feel more comfortable putting their money to work in the markets. After his first week in office, we are seeing him beginning to do just that.

If he chooses to flip-flop on his policy measures or throws around radical proposals, that could put the markets in a holding pattern or cause them to reverse course.

Keep Investing in the Stock Market

Like everyone else, I don’t know what’s going to happen in the markets from year to year. Generally speaking though, I think a Trump Presidency holds great things for American business and the American worker. He clearly has telegraphed this to be a high agenda item. And, all other things being equal, what is good for American business is good for the stock market and, in turn, investor’s portfolios.

But here is the thing…you should be invested in the stock market no matter who is President. We invested during the entirety of the last eight years and our net worth grew despite President Obama’s policies. Other factors in our lives contributed to that growth but being invested in the stock market played the biggest role.

From my perspective, stock market investing isn’t about the next month or the next 4 years. I view it as a long-term venture for the rest of my life. Done wisely and with consistency over time, it’s the biggest generator of wealth for the average American outside of our paychecks.

I’d encourage you to get started sooner rather than later. The longer you invest in the stock market, the better chance you have at achieving financial freedom.

Questions for Discussion: What are your thoughts about a Trump Presidency as it relates to the stock market? What other things does the market hate? What is keeping you from investing? How can you overcome that?

Image courtesy of Gage Skidmore at Flickr Creative Commons

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  1. Plus, if you invest consistently, your money will average out, and you’ll get a consistent return that matches the overall stock market. Even though dollar cost averaging isn’t the optimal investment strategy, it’s a nice silver lining for most of us who invest on a monthly basis as we get paid.

  2. Smart argument Brian. I agree that investors shouldn’t jump in and out of the market on shorter-term reasoning (even 4 years is short-term when you consider lifetime investing goals).

    I would say though that now is a great time to rebalance assets. The eight year bull market has meant a lot of people probably have more money (percentage of their total portfolio) in stocks than they planned or should according to their goals. Shifting some of it back into bonds, real estate or other assets will help balance the portfolio and better align with goals…and avoid any big stock selloffs.

    Great post.

  3. Nice analysis. Whether it’s Trump or any other leader, we should still invest and make the right decisions along the way and make it consistent.

  4. Agree – Investing in the stock market no matter who is president can only be beneficial if you’re investing for the long run!

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