In many regards, Donald Trump has been the most unorthodox politician in decades to rise to prominence. This led to a complacency regarding his electability. We have now learned that despite, or perhaps because of, his multifaceted unorthodoxy enough US voters embraced his candidacy to bring him to power. Perhaps as significantly, Trump has carried in his wake Republican majorities in both the House of Representatives and the Senate, and he will come to power with a Supreme Court nomination up his sleeve. Markets are now pricing in what all this will mean.
On election night, Asian markets priced in Trump’s stated foreign policy measures and the rise in geopolitical uncertainty and deglobalisation they are expected to bring. This resulted in a significant downdraft in stock markets and the Mexican peso. On the day after the election, US markets priced in Trump’s economic policies. These are broadly stimulatory: cuts to tax rates, a commitment to fiscal stimulus and infrastructure spending, and deregulation.
Four factors give these policies added impact:
First, the new Republican hegemony means many of these proposals may cut through institutional gridlock and actually be enacted. This is in stark contrast to the policy quagmire that most western governments have found themselves in where much is postulated but little is done.
Second, many of the proposals are simply the mainstream conservative supply side economics successfully implemented by Reagan and Thatcher. These include corporate tax cuts, personal tax cuts, a capital repatriation program and broad-based deregulation. These policies are generally beloved by markets for their growth-promoting impacts.
In contrast to this conservative orthodoxy is Trump’s embrace of fiscal policy and major public works. Whilst usually markets would be wary of such deficit-swelling policies, current fears of secular stagnation have meant that many conservative theorists and investment market participants are supportive of deficit-funded fiscal expansion. So, Trump’s stimulus policies include the big guns of both the traditional right and the traditional left.
And the fourth boost to Trump’s economic policies is the prospect of a normalisation of interest rates. Post the financial crisis, central banks have pushed monetary policy to greater and greater extremes. The corrosive effects of these low- and negative interest rate policies on asset pricing, pension funding and pensioner spending power have become increasingly apparent. A Trump administration is expected to lead to a steeper yield curve, via higher economic growth, higher inflation, and perhaps even the loss of independence of the Federal Reserve.
So, while international markets initially focused on the geopolitical realignment that the world will have to work through, the US equity market’s focus on the boost to the US economy was enough to more than reverse those initial losses. After all, America is the world’s economic engine room so for the most part a stronger America means a more robust global economy.
In this way Trump’s geopolitical and economic unorthodoxy are currently being priced in with a glass-half-full perspective. What markets have yet to price in is any future impacts from Trump’s unorthodox political persona. Will his presidency reflect his statesmanlike and inclusive acceptance speech, ably supported by the best of the conservative brains trust as he has promised? Or will the world’s new most powerful man (and yes, for now at least it is still a man) at least occasionally revert to the outbursts and ill-discipline that was evident at many points during the presidential race? Sadly, we clearly face the prospect of Trump’s personal volatility translating through to geopolitical and market volatility – and probably on a regular basis.
And what will happen when political and economic realities crimps Trump’s ability to deliver on all those sound-bite policy promises? What happens when Mexico doesn’t pay to build the wall, and dismantling Obamacare doesn’t bring down health care costs? Trump’s support base is unlikely to take kindly to America not becoming great again on a brisk timetable. And investment markets too may find that the honeymoon ends all too quickly, as any number of unintended consequences of breakneck policy implementation begin to appear.
But for now, we have a man with a plan – and after so many years of muddle through, markets will happily take that for now.
Written by Kate Howitt, Portfolio Manager, Fidelity Australian Opportunities Fund: (VIEW LINK)