The Effect Of 'Relief Rallies' Since The US Presidential Election

30 January 2017
The financial sector rejoiced on Wednesday as the Dow Jones finally hit the psychologically important 20,000 mark.

The price weighted index had been threatening to hit this milestone for some time, even frustrating watchers at 19,999 earlier in the month. But as the markets opened on the 25th, the Dow made it, and demonstrated the second fastest 1,000 point gain in history (the first was in 35 days back in the dotcom bubble heyday of 1999).

How the Dow Jones Has Performed in the Wake of the Election

This is not the first time the Dow has looked especially good since the surprise election of Donald Trump as President of America. In December, a rally was seen that came close to the 20,000 mark, and there were upward trends even in the direct aftermath of the election.

Rallies occurred after the election, after the electoral college vote, and now we are seeing a rally sparked by the final inauguration of the new president. Trump himself tweeted that the Dow hitting 20,000 was ‘Great’, but his divisive and vocal advisor Kellyanne Conway was quick to attribute the good health of the Dow to ‘The Trump Effect’.

Trump Effect, Or Relief Rally?

While Kellyanne Conway and other members of Trump’s team will of course want the president to take the credit for the Dow reaching 20,000, markets experts point out that the changes in the benchmark index are a little more complicated than that. The share prices on which it is based are likely to have moved in part because businesses are anticipating business friendly policies and reduced taxation and regulation under Trump, but also partly because of the ‘relief rally’ effect.

In research carried out by IG it has been found that the Dow and the S&P 500 both tend to rally after an election result, irrespective of which party is elected.  Figures show that historically, both the Dow and the S&P saw gains of around 7.4% after two thirds of elections, predominantly due to certainty about what to expect. This is attributed to the fact that an election result removes some uncertainty, and we may now be seeing the same phenomena following Trump’s election.

Relief Rallies

Relief rallies can occur after elections and other important political events and do not always mean that the markets support the result – merely that the removal of uncertainty that comes when they ‘know what they are getting’ allows them to strategise and plan better. Once a candidate is selected or a policy is announced, businesses are in a position to decide what to do, and this gives investors more faith in them than they have during pre-election periods where there are lots of possibilities and risks.

The share indices can also perform surprisingly well when their corresponding currencies perform badly, due to businesses earning in different global currencies, which is why the Dow could reach this milestone even while the dollar was looking weak. It could be said that the opposite effect was seen in the UK last week, when relief sparked by Theresa May’s plan to leave the European single market caused the pound to rise, but the FTSE 100 index to drop: dollar earning companies suffered from the strength of the pound.

Some are predicting that this is just the start of an upward trend that is going to last for some time. What we do know is that Trump’s first weeks in the White House, and the decisions he makes as President during this time, will have an effect on the markets.

Any views or opinions expressed do not necessarily state or reflect those of CANSTAR.

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