Lessons in market inefficiency: Trump stocks edition
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Markets are very far from being perfectly efficient, and a prime example can be seen in the performance of "Trump trade" stocks since Election Day.
Why it matters: What goes up often keeps going up. It's impossible to know when or whether a certain piece of news has already been fully incorporated into share prices.
The big picture: Companies like Tesla, Palantir and Robinhood have seen a big bump from the election of Donald Trump.
- Tesla has the Elon Musk factor, Palantir is expected to see a significant uptick in government revenue, and Robinhood should benefit from the deregulation of financial services in general, and crypto in particular.
Flashback: All three of those companies hit new 52-week highs on Nov. 6, 2024, the first full trading day after Election Day.
- Trump had significantly outperformed expectations for how he would fare, sending Robinhood up 5% that day, Tesla up 6%, and Palantir up 8%.
- Those gains were small, however, compared to the amount all three of those stocks have risen since after Election Day.
Between the lines: It's hard to make the case that the fundamental value of Tesla has risen by 41% since Nov. 6, or that Robinhood has soared in value by 71%.
- But the degree to which Trump's election to a second term has helped those companies is unknowable, and the market consensus on that question has been changing significantly on a daily basis.
How it works: When Tesla, Palantir and Robinhood all hit new highs on Nov. 6, those stocks seemed high and expensive, and their current share prices were almost impossible to comprehend.
- It can take weeks or months for the market to get used to paying an amount for a stock that would have been unthinkable before an election.
The bottom line: The market is, broadly, extremely good at incorporating news within a fraction of a second. Sometimes, however, that process can take more time.
