By Scott Phillips
If you've been keeping an eye on the stock market lately, you will have noticed something strange. Or, at least something than the punters and pundits didn't expect.
Yes, I'm talking about Donald Trump. Not his election, though that was unexpected enough. I'm talking about the "Trump Effect" – or the "Trump Pump" as my colleague Andrew Page has taken to calling it.
President-elect Donald Trump has inspired a share market rally, but has it gone too far?Credit: AP
Conventional wisdom before the election was that Trump would lose. And conventional wisdom also had it that should Trump somehow emerge victorious, markets would tank. After all, this was an incredibly unconventional candidate with very unusual (compared with the political establishment) policies and, frankly, some policies that hadn't been fully explained.
And, as we know, the market hates uncertainty, right?
Well, Trump's election turned conventional wisdom on its head, so perhaps we shouldn't be surprised that the market's response was also unexpected – the Australian Securities Exchange, after dropping 2 per cent in the immediate aftermath of the election, is up 6 per cent in a little over two weeks. For context, the market's average gain is about 10 per cent in a single year.
We can trace the change in market sentiment – here and around the world – to Trump's victory speech. Far from repeating some of his more controversial policies, he sounded a note of conciliation and reason. The market liked what it heard.
So that – perhaps – would justify the recovery of the post-election losses. But what about the additional gains?
That's a more problematic question. After all, it's not like the stock market was unaware of Trump's policy platform. And there were few-to-no market commentators talking up the aftermath of a Trump win, pre-election.
Victors write history, and the market, in the afterglow of the election, is rewriting its own expectations of only days earlier. If you're thinking words like "fickle", "flighty" and "lemmings" apply to the investment herd, you'd be right.
Now, the (new) narrative is appealing: President Trump will spend up big on infrastructure. He'll slash company tax. He'll restore confidence to business and consumer spending. He'll roll back regulation and lift restrictions on resources companies. America will be, to lift a line from an antipodean victory speech, open for business.
It's a seductive narrative. And plausible. But here's the problem: so was the negative one. You remember, just three weeks ago when Trump was an unknown quantity. With little policy substance and an unworkable set of promises. Whose policies would jeopardise the very international trade that's lifted our living standards over the last three or four decades.
That was then, apparently. This is now.
There are only two problems with that approach. Firstly, other than knowing who won the election, we're as much in the dark about what a Trump presidency would mean for business and investors as we were three weeks ago.
But worse, the market has already started pricing in the best-case scenario. And that's rarely a good idea. Heads, you don't win much from here. Tails, you lose. That's a pretty unattractive risk-reward trade-off – over the short term, at least.
Foolish takeaway
I'm the last person to say you should worry about short-term market volatility – it's as ever-present as it is unpredictable. But when investors can swing from fear to optimism by such a large amount in such a short time it's important to remember that markets can be both irrationally optimistic and pessimistic.
We won't know for a while what President Trump will mean for shares. But history tells us that our best bet is to be agnostic, and rely on time and quality companies – not presidents – to build our wealth.
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Scott Phillips is the Motley Fool's director of research. You can follow Scott on Twitter @TMFScottP.