What you  need to know about the post-election stock market rally and how Wall Street views President Trump's policy goals

Why The Stock Market Rallied Post-Election (& What It Means For You)

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Over the last few months, news agencies have peppered us with a variety of unusual headlines. However, one story has remained consistent—the stock market has shown strong gains since President Trump's election. With so much uncertainty posed by the new administration, a prolonged rally may seem surprising. So what is behind this streak? And more importantly, what should you do about it?

1. President Trump is expected to cut corporate tax rates.

Trump's economic agenda is considered to be pro-business, which is a major stock market driver. Part of his agenda involves cutting corporate tax rates from 35% to 15-20%, which ultimately boosts profitability. Currently, domestic corporations pay U.S. taxes on profits generated in any country if that cash is brought back to the United States. Since businesses already pay taxes in the country where they earned revenue, some keep profits offshore to avoid getting double taxed. In theory, a meaningful U.S. tax cut would encourage businesses to bring profits back to the U.S., which would lead to more investment and employment here. While some disagree that tax cuts will actually boost long-term investment and hiring, the market has reacted positively.

2. Wall Street believes Trump will deregulate the financial sector.

Financial stocks are up because Trump is expected to minimize bank regulations. Now let's back up. After the financial crisis in 2008, a piece of legislation called the Dodd-Frank Act established strict rules on the banking system. These large banks are the epicenter of our economy, and their failure could completely derail our system (i.e. "Too Big to Fail"). Hence the need for regulations to protect us. The problem is that some of the new rules hurt banks' profitability. A couple of these include:

  • Requiring banks to hold a minimum amount of cash. This is kind of like a rainy day fund for a bank. While it's good to set money aside in case of emergency, banks believe the required amount is too high, which hurts profits. If the banks could use this cash to make loans, they could earn a higher return. Plus, this rule keeps billions of dollars out of the economy, as it sits in cash on the sidelines.
  • Restricting the way banks can invest. If a bank holds customer deposits, Dodd-Frank precludes it from deploying risky trading strategies. This, of course, protects those deposits. Historically, banks invested in private equity, hedge funds, and other riskier assets that could earn a high return and boost profitability. Now, these options are limited.

The bottom line is that if Trump eases Dodd-Frank regulations, financial sector profits should increase. And that's why their stocks are up.

3. Trump plans to spend $1 trillion on infrastructure projects.

President Trump's plan to spend $1 trillion on aging infrastructure has lifted industrial and materials stocks. The new administration will incentivize private institutions to fund construction and repairs of roads, bridges, tunnels, airports, and public transit systems. Infrastructure spending will not only increase American jobs, but also make it more efficient for people to get around. It's no secret that we are still struggling to recover from the 2008 recession. Wall Street thinks this infrastructure plan will boost investment in our economy and spur a quicker recovery.

What does the stock market rally mean for you?

The answer to this question might surprise you. If you are a long-term investor, daily market swings should mean absolutely nothing to you. People who try to time the stock market almost always underperform steady, long-term investors. The market is so unpredictable in the short-term, that trying to chase it is almost like gambling. On the other hand, historical long-term returns are impressively consistent. If your goal is to build long-term wealth, periodic fluctuations shouldn't matter.

The Bottom Line

The recent stock market rally is based on the sentiment that Trump's agenda is pro-business and pro-growth. But let's be pragmatic—these policies haven't even been implemented. The market is simply reacting to expectations, which means it could turn in a heartbeat. It's good to understand market drivers and current events, but that doesn't mean it should influence when you buy and sell. My best advice is to stay the course and continue making regular deposits into your diversified investment portfolio (I use Wealthfront for this).

I'd love to hear your feedback on seeing more content related to current events. Leave a comment below or email me at modmoneyblog@gmail.com. Looking forward to hearing from you!

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