Stocks Rose Dramatically After Trump Won the Election. What History Says Could Happen Before Year-end?

On Wednesday, U.S. stocks reached new record highs as Wall Street cheered Donald Trump’s return to the White House. Historically, stocks have tended to rally after an election, and many market analysts believe the gains could continue through the end of the year.

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Stock Market Patterns in Election Years

Historically, stock markets tend to show modest growth between Election Day and the close of the calendar year. Since 1928, the S&P 500 has averaged a 1.2% gain from Election Day to the last trading day of the year, rising during this period about 62.5% of the time. The Nasdaq Composite has shown an average increase of 1.5% during this timeframe since 1972, while the Dow Jones Industrial Average has delivered a slightly higher average return of 1.8% since 1896, according to Dow Jones Market Data.

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Although these averages suggest a positive trend, the range of performance between Election Day and year-end has varied widely in previous election years. For example, in 1984, the S&P 500 hit a high on Election Day but later dropped by 5% by December. Similarly, in 1996, the index rose by 4.5% after Election Day but then lost those gains by mid-December.

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This historical volatility underscores why BTIG's chief market technician, Jonathan Krinsky, advises against viewing past performance as a reliable predictor for the current year.

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Krinsky noted that, although the S&P 500 has already gained over 24% in 2024, another market dip may occur before a potential rally toward the end of the year. He suggests that election-related momentum could still boost stocks before year-end, despite the possibility of short-term volatility.

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Market Reactions to Trump’s Victory

U.S. stocks surged on Wednesday morning, driven by so-called “Trump trades” as investors shifted focus to assets expected to perform well under Trump’s policies. Equities tied to Trump’s economic agenda, including financial stocks, small-cap stocks, the U.S. dollar, and bitcoin, all experienced gains. Financials rose 6.16%, and small-cap stocks gained 5.84%, while the U.S. dollar strengthened, and bitcoin saw positive movement.

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Conversely, Treasury prices faced a sell-off, pushing yields on longer-term bonds higher. Many investors are concerned that Trump’s economic plans could rekindle inflation and possibly reduce the need for further interest rate cuts by the Federal Reserve.

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The stock market’s response on Wednesday wasn’t solely due to expectations of Trump’s pro-business policies, such as tax cuts and deregulation, which could benefit large corporations. Ken Mahoney, CEO of Mahoney Asset Management, noted that investors were also relieved that this year’s election concluded without significant delays, unlike the 2000 election, which took weeks to resolve. This quick conclusion, Mahoney suggested, removes a major uncertainty and sets the stage for a potential year-end rally.

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Looking forward, Mahoney believes the market has “all the ingredients for a year-end rally,” citing the election’s resolution as a major risk-clearing event. He points to additional factors, such as strong earnings growth, expected Fed rate cuts, and a healthy labor market, all of which he sees as positive indicators for the economy and the stock market. Brooks Friederich, a principal director at Envestnet PMC, echoed this optimism, stating that these elements could provide continued support for the market.

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Potential Challenges to a Year-End Rally

While the election outcome has cleared some uncertainty, it isn’t the only potential hurdle for a year-end rally. Some investors are concerned that the ongoing sell-off in the Treasury market might eventually spill over into stocks, creating additional challenges.

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On Wednesday, the bond market saw notable moves as the 30-year Treasury yield rose the most it has in two years. The 10-year Treasury yield climbed by 13.8 basis points, reaching 4.425%, while the 30-year rate jumped 15.3 basis points to 4.602%, according to FactSet.

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Investors will soon be watching for the Federal Reserve’s next move, as the central bank’s November meeting is expected to include a rate cut of 0.25%. The Fed’s decision is set for announcement on Thursday at 2 p.m. Eastern, followed by a press conference with Chair Jerome Powell.

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Market participants will closely analyze the Fed’s statement and Powell’s remarks for any indications on future monetary policy directions, as well as the central bank’s outlook on inflation and economic growth under the renewed Trump administration.

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As the Fed’s decision looms, investors remain cautious yet hopeful. The positive stock performance on Wednesday reflects optimism about both Trump’s policy agenda and the avoidance of prolonged election uncertainty.

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However, with potential challenges in the Treasury market and broader economic concerns, the market’s path to a year-end rally may still encounter turbulence. Investors will continue to assess a range of factors, from economic data releases to Fed communications, as they gauge the outlook for equities in the final months of the year.

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