Why the markets seem to have embraced Trumponomics

Just before the U.S. election, analyst and portfolio manager Jason Castelli thought that if Donald Trump won, there would be an initial, knee-jerk reaction causing amarket sell-off, followed bystabilizationover the next severaldays.

"What I thought was going to happen over a couple of days or aweekor two weeks, happened in a matter of hours," he said."It was quiteastonishing."

Global markets initially tumbled following the U.S. election results last month, but had rallied by the next morning, finishing at a near all-time high. And since then, Wall Street seems to have welcomed a Trump presidency, as the markets continueto climb in North America.

Markets did takea hit on Wednesday after investors were surprised thatthe U.S. Federal Reserveprojected three more rate increases for 2017 the Dow Jones industrial average fell 118.68 points.

But the Dow Jones, which opened election day at 18,251.38, still closed Wednesday at 19,792.53, and continues tocreepcloser to a20,000 milestone.

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"So it's been a massive, massive rally, and I thinkthere have beena few factors that have driven this," said Colin Cieszynski,chief market strategist at CMC Markets.

Many investors, including those whofor at least a few hours during election night had deep concerns about a Trump victory, have come around in the following weeks, and now see a future administration that is pro-business and market friendly.

Trump's promisesduring the campaign to cut corporate tax rates and regulatory bureaucracyand spend money on infrastructure were seen as positive moves in the eyes of investors. As well, Trump has proposed incentives forcorporate America to bring home more ofits cash held abroada one-time 10 per cent tax on repatriated cash.And much of thatcould end up in the markets.

"When that cash does come back to the U.S., most likely corporate Americawill use thatto buy back shares and increase dividends,"Castelli said.

ButTrump'santi-trade rhetoricand threats to rip up NAFTA also raised significant questions. Post-election, however, Trump seems to be focusing more oncutting taxes than gutting trade deals.

Real priorities surface

"I think people are learning more about what Trump's real prioritiesare and they're more business friendly than you would have thought based on the campaign," saidEricZitzewitzan economics professor at Dartmouth College.

"Since the election, we've heard a lot about traditionally Republican conservative [policies] ... and nothing about NAFTA."

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In another boon for investor confidence, Trump has been choosingtop business executives to fill his cabinet.

"They are obviously going to be putting forward policies that are pro-business, less regulations," Castelli said.

"[Investors] realize that Trump is a businessman and a lot of the people he's appointing are business people, and they obviously would not want to do something negative that would impact the economy and hence their businesses."

However, Cieszynski said therallyis not all a Trump phenomenon. Partly it has resulted from the returnof investors who had kept cash on the sidelines while theyworried about the outcome of the election.

"There's been a lot of worry hanging over the market this year," he said. "First it was Brexit, then China, then the U.S. election.

"Once the election was over, it unleashed a lot of pent-up demand with capital just flowing back into the markets."

Castelli agreed that the environment was ripe for a market rally, with lots of cash on the sidelines andunderlying trends that were positive for the equity markets.

"Then you look at the policies that Trump is proposing and they're pro-growth," he said.

Market correction possible

The continuity provided by aHillary Clintonwin also would have meant market growth, butnot likely to the same extent,Cieszynskisaid.

At some point the markets are likely to level off, and there could be a correction, he said.Investors with highexpectations of a Trump administrationcould begin to cool once many of theproposalsthey favour drag through the laboriousCongressionalprocesses.

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"It's going totake a whilefor all that to get implemented," Cieszynski said. "By the time it goes through the budget process and things get approved and money gets allocated, that could be a year or so from now.

"At some point you end up with this disconnect. I call it the 'hammock effect.'Where you're kind of stuck in this sagging middle. So at some point that will hit, but it's hard to say when. Rightnow people areprettyeuphoric."

Meanwhile, Zitzewitzobservedthat this market rally has been somewhat confined to North America. Otherstock markets are below their peaks. Inparticular, emerging markets those in Latin America and East Asia that are dependent on trade are down.

"It's worth tempering a little bit when we talk about how stocks have done," he said.