Mystery solved?

It is still a mystery at least to me why the market reacted so much positively to the Trump victory. It is very counterintuitive and I bet no one ever expected this reaction prior to the election. So I have been trying to decipher the mindset of the market in the past few days and finally I think I understand why.

As expected, the market initial reaction was a shock and panic when it became increasingly possible that Trump would win the election. A 5% crash of the market futures and a huge run of the gold price overnight was exactly what was supposed to occur for the surprising Trump win. So why this panic did not hold after the market opening? I bet this was most likely related to another very unexpected outcome of this election: Not only Trump had a landslide victory but also he helped the Republican to win both the Senate and the Congress. In other words, no one has ever expected this kind complete winning by the Republican. Regardless who you expected to win, I bet the power distribution for Washington DC was universally expected to be divided, i.e. the presidency vs Senate/House would be shared between the 2 parties. But after the initial shock, the market finally realized that at least in the next 2 years, the Republican will be in full control of the White House and the Capital Hill. This unexpected unilateral power control by the Republican is considered very positive to the market but negative to gold:

• Trump has a very bold business-oriented agenda to completely reform and change the political and economic landscape in the US. The high level changes we can expect to see include drastically reducing corporate and personal taxes, repatriating enormous amount of corporate cash held off-shell by slashing the heavy punitive taxation, repealing the notorious Obamacare and hundreds of his Executive orders that are killing business, downsizing the government and heavy regulations, and large-scale rebuilding the very poor and discarded infrastructure. It would be very difficult to implement any of these if Trump would not have a cooperative Capital Hill but now this concern is virtually removed. As such, we should expect to see a more business friendly environment in the next couple of years, which is definitely welcome by and positive to the market. The bond market seems to very much foresee this as the long-term Treasury interests have skyrocketed high so fast not seen before, meaning an expectation of higher inflation due to a booming economy. If you check the historical market performance during the Republican Trifecta, the evidence is very clear that the market should be doing well in this kind of situation. The Republican has only controlled both the White House and the Capital Hill 2 times before: during 1953-1954 and 2003-2006. So what was the return of the stock market? Huge: 36% and 61% respectively during the 2 periods. Of course there is no guarantee whatsoever that this time we will see the same good market performance but before we see anything suggesting otherwise, we have to give the benefit of doubt to the Trump presidency. I believe the market has finally realized this great potential from the Trump administration and therefore mounted a very surprising and powerful turnaround rally.

Naturally, when the panic was gong, gold got hammered. The projected increasing inflation and strengthening dollar is certainly quite negative to gold in the short term. I have been saying for months that I don’t believe the gold correction is over and may continue for a while to bring gold down possibly to $1200. Even if gold indeed jumped high after the election, it would be short-lived. The pain for gold will likely continue, probably till the Fed rate hike in December. But regardless, I think we are very close to the bottom of this gold correction. Long term, I’m super bullish for gold!