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Global markets whipsawed by Trump victory

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Despite expectations of financial collapse if Donald Trump were elected president, international markets have responded well since Election Day. (Jessica Christian/S.F. Examiner)
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Caught off guard, financial markets reacted sharply to Donald Trump’s election victory Tuesday.

But contrary to many predictions of tanking global markets in the event of a Trump win, markets worldwide and in the U.S. quickly rebounded and have actually shown surprising strength. Just like the election results that caught prognosticators unaware, the financial reaction has caught many experts flat-footed.

“Oh my God, this [election] is going much differently than was expected,” Wells Fargo Chief Investment Officer Erik Davidson said from his Carmel office Thursday about the week’s market action.

Davidson attributed the market’s turnaround to Trump, in his victory speech, appearing presidential and gracious. This, together with Hillary Clinton’s concession speech and President Barack Obama’s remarks Wednesday, helped reassure markets that a peaceful transfer of power was on track.

Also, word that Trump would push for infrastructure spending also cheered the markets as they eyed the potentially profitable prospect. The American Society of Civil Engineers has estimated the cost of fixing America’s infrastructure to be $3.6 trillion by 2020 potentially making for big-ticket spending on infrastructure.

Charles Schwab Center for Financial Research, however, sounded a note of caution to investors.

“We expect [volatility] will last as long as uncertainty remains,” Schwab warned in its report this week. “How President Trump will govern is a huge wild card.”

It pointed to many factors which could lead to a period of higher volatility in the markets. Chief factors cited were that Trump still needs to put together a cabinet, hire a staff to figure out policy priorities and develop a relationship with Congress and, in particular, with some members of his own party.

Furthermore, they expressed much will also depend on whether Trumps makes good on his campaign promises. Those promises include building a wall on the Mexican border, repealing and replacing the Affordable Care Act and cutting individual tax rates.

In the near-term Schwab noted, Trump and Congress will be facing another budget deadline Dec. 9 for funding government operations. In the past, this has been a contentious issues for a faction of Republican legislators.

As if to underline this point, the often overlooked bond market saw dramatic action this week with Interest rates on the 10 year Treasury bond increasing by an extraordinary quarter to half a point.

“We have likely seen lowest interest rates for a generation,” Davidson said.

Davidson further cautioned there is a high probability of a recession just based on the length of current economic recovery. Davidson said this is the second longest economic recovery in U.S. history.

Venoo Kakar, assistant professor of economics at San Francisco State University, echoed Davidson’s view.

“The Federal Reserve is on course to raise interest rates driven by [economic] fundamentals,” Kakar said. “We cannot have interest rates too low for too long because it fuels asset bubbles.”

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