The Trump Trade: Stocks’ Biggest Post-Election Rally Ever

No, it’s not the Dow 20000. But the Dow Jones Industrial Average may have taken a bigger step in the market.

The Dow’s 8% gain in the five weeks following Donald Trump’s victory is the largest post-US presidential election increase in history. The rally, which has averaged the blue chips at the pace of its fastest advance of 1,000 points, was accompanied by a sharp increase in bullish sentiment.

When stocks are moving this far and this fast, caution is usually in order. This time, history might suggest otherwise.

There have been five other instances in which the Dow Jones jumped at least 5% over a five-week period following a presidential election. Over the next six months, it continued to rally four out of five times, gaining another 10% on average.

The most recent example dates back to 1996. The Dow Jones jumped 5.3% in the five weeks following Bill Clinton’s re-election, then jumped another 18% in the following six months. He had similar reactions after the elections of 1900 and 1924. The only time the model did not prevail was in 1952 when Dwight Eisenhower was elected. The Dow Jones jumped 5.3% immediately after the election, but then fell 7.5% over the following six months.

Unsurprisingly, today’s strong rally has investors saying they are feeling better about the future prospects of the market. A survey by the American Association of Individual Investors quickly turned from acute pessimism to optimism. Thursday’s latest reading showed for a sixth consecutive week that bullish sentiment was above its historical average.

What stands out is the rate of change – how quickly investors have become so cheerful – that could be problematic. In early November, only 23% of AAII respondents said they were optimistic, among the lowest readings of the year. By Thursday, that number had risen to 45%, the third-highest value in 2016 and one of the biggest swings in the current bull market.

A similar shift in sentiment took place in May 2013, just as stocks rebounded just before the so-called tantrum. Just at the right time, bullish sentiment peaked in late May and stocks fell over the following weeks.

But investor sentiment is often more useful as a contrarian indicator when it reaches extremes. It’s not there now. One of the AAII’s lowest bullish readings came on March 5, 2009, which almost precisely marked the start of the current bull market. The most bullish reading was captured in January 2000, just two months before the peak of the dotcom bubble.

Today, the absolute uptrend level is still far from stretched. Bullish sentiment has remained below 50% for 102 consecutive weeks. “It has become seemingly impossible for the bull camp to secure a majority,” Bespoke Investment Group analysts wrote on Thursday.

At the gates of the Dow 20000, this rally defied almost all received ideas. As crazy as it sounds, he might still have legs.

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Appeared in the print edition of December 16, 2016 under the title “Stocks” Other Big Milestone.

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