What Does the Market’s Response to Trump’s Election Tell Us About Investor Expectations?

[Nima]

Here is an excerpt from my latest post analyzing what the market's reaction to Trump's victory tells us about investor expectations:

So in summary, it looks like investor expectations of inflation remain low, while their expectations of corporate profits have jumped significantly, prompting them to sell gold and long bonds, while adding to their stock positions.

You can read more on the components contributing to aggregate corporate profits in this post about the Kalecki equation, which basically reveals that mathematically corporate profits can only be derived via the following spending/saving decisions made by different entities:

Corporate Profit = Investment + Dividends – Household Saving - Government Surplus + Export Surplus

There are several reasons why investors expect boosts to corporate profits, just to name a few:

Donald Trump has promised a significant corporate tax cut, which, all else being equal, will boost corporate profits noticeably. (In the equation above it would manifest itself in the form of a smaller budget surplus or a larger deficit).

Furthermore, the elimination of arbitrary and scientifically unwarranted CO2 emission restrictions will likely boost domestic investment in oil, coal, and natural gas, which again, all else being equal, constitutes a net positive for corporate profits. (In the equation above this would affect the "Investment" component.)

It remains to be seen where household saving is headed, and also what happens to the trade balance, and other government spending programs which, if unmatched by tax hikes, could provide a further boost to corporate profits.