The stock market rallied to all-time highs on Wednesday following Donald Trump's victory in the presidential election. The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite indexes each reached new record levels.
Here's what you need to know about why the market responded in this way, and what it means for your investment strategy.
Why the markets surged post election
Analysts attribute the market surge to two key factors:
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Reduced uncertainty. As I've covered previously, the prospect of a new government and potential policy shifts can create a whirlwind of speculation, leading to market volatility that can unsettle even seasoned investors. An election outcome—regardless of the winner—eliminated the uncertainty that had weighed on the markets prior to the vote. In fact, the U.S. stock market has historically tended to rise regardless of which party wins the White House.
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Prospects of a business-friendly government. Investors are anticipating pro-business policies from a second Trump administration and a Republican-controlled Senate.
The Dow closed up over 800 points, or 2.9%, while the S&P 500 and Nasdaq gained 2.2% and 3.9% respectively. As we've already seen, Trump has a penchant for rolling back or undoing regulations, which benefits sectors that might have experienced greater scrutiny under a Harris administration. Banking, energy, and technology stocks were among the biggest winners in the days following the election.
What this means for you
While this news might make it tempting to buy shares of Tesla or Bitcoin, you might want to take a beat, first. As a rule of thumb, financial advisors caution investors against making sudden, drastic changes to their portfolios based on this one-time event.
The so-called "Trump trade" could easily turn into a bumpy road—investors should be wary that parts of Trump’s economic platform, such as tax cuts and tariffs, could stoke inflation. Plus, all the details of the timing and implementation of the Republican policy agenda are hardly clear at this time.
It's never a good idea to dramatically alter your investment strategy in response to a specific election outcome. Instead, this could be a good time to rebalance and make sure you're not overly exposed to any one sector or company. So while the rally may be tempting, always evaluate your overall asset allocation first before jumping in.
Allowing current events to constantly sway your financial decisions can lead to emotional stress and decision-making influenced by fear or overconfidence. After all, you're not as objective as you think—here some tips so that you don't lose money over it. In the end, experts recommend staying disciplined and sticking to your long-term investment plan, regardless of who occupies the White House.
And if you experienced some gains and anticipate a big expense in the short term, converting some of your earnings into cash or certificates of deposit could be a good move.
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