Markets have not given Trump a free pass – far from it
Up until now Trump has done little to damage sentiment, but that does not mean investors are giving the president the thumbs-up
For a highly unpredictable and impulsive United States president who has threatened nuclear war and flouted nearly every political and diplomatic convention, Donald Trump has not done too badly in the eyes of financial investors.
In the run-up to his unexpected victory in the presidential election a year ago last Tuesday, the vast majority of asset managers were convinced that a Trump win would trigger a sharp and disorderly sell-off. The real estate tycoon’s nationalist and protectionist economic agenda was thought to pose a serious threat to emerging markets, in particular China.
Yet the prediction of a “shock to financial markets”, “tightening [in] financial conditions” and “a significant slowdown in US [and] global growth” made by Citigroup less than three months before the election (several other global investment banks had equally bleak views about a Trump presidency) proved to be wide of the mark.
From a market perspective, Trump has reasons to celebrate.
The benchmark S&P 500 equity index has surged nearly 20 per cent since the election, the third-strongest rally in the first year of a modern US presidency, according to data from Bloomberg. More strikingly, the Vix Index, Wall Street’s so-called fear gauge, which measures anticipated volatility in the S&P 500, has fallen to its lowest level in 20 years.
Financial conditions, moreover, have eased since Trump’s victory. The dollar index (a gauge of the greenback’s performance against a basket of other currencies) has fallen more than 4.5 per cent. More surprisingly, bond markets are pricing in little risk of a fiscal splurge that will drive up inflation, forcing the Federal Reserve to raise interest rates aggressively. Indeed the Treasury “yield curve” is now at its flattest level in a decade, suggesting investors are quite bearish about the outlook for inflation.
Perhaps most strikingly, emerging markets have prospered under Trump’s presidency. According to JPMorgan, inflows into emerging market bond and equity funds this year have surged to US$170 billion, nearly as much as the record level of US$185 billion for the whole of 2010.
Make no mistake, global markets have been buoyant since Trump’s shock victory. The knee-jerk 5 per cent plunge in the S&P 500 in the hours following his election is a distant memory.
But do Trump and his policies have anything to do with the rally, and what do markets really make of the president?
The best thing that can be said about Trump’s victory is that it has not proved to be the financial calamity which many predicted. But then neither has Britain’s unexpected decision to vote to leave the European Union, the other big political shock of 2016.
The reality is that Trump has been incredibly fortunate. Not only has his first year in office benefited significantly from the ultra-loose monetary policies of the world’s leading central banks – including the Fed, which is withdrawing stimulus at a gradual pace – global growth has been picking up, particularly in Europe. This has encouraged investors to pour money into so-called risk assets, notably equities and emerging-market debt.
The Fed’s cautious interest rate-rise cycle and the aggressive quantitative easing programmes of the Bank of Japan and the European Central Bank have outweighed concerns about Trump’s severe political woes.
Yet it would be wrong to assume that investors have given Trump a free pass – far from it.
The near 8.5 per cent decline in the dollar index since early January partly reflects waning confidence in Trump’s ability to push through meaningful pro-growth policies due to the multiple scandals plaguing his administration. Last week, global stock markets came under strain because of mounting disagreements within the Republican Party over Trump’s proposed tax reforms.
More importantly, Trump’s erratic and impulsive behaviour, particularly on the world stage, is an increasing source of concern and, shockingly, is now viewed by many fund managers as one of the main sources of geo-political risk. In a note earlier this year, AllianceBernstein, a US fund manager, warned that under Trump the US risked becoming a “rogue state”, “defiant, isolated, unable to engage constructively [and] aggressive.”
Investors may be taking comfort in the fact that, up until now, Trump has done little to damage sentiment, but that does not mean markets are giving the president the thumbs-up.
While the prospect of aggressive tax cuts has helped buoy US equity markets, investors remain uneasy about Trump – who could yet face calls for his impeachment if it is proven that he colluded with Russia during the presidential campaign – and are just hoping that he does not provoke a full-blown crisis.
A year after the US election, “Trump risk” has by no means disappeared.
Nicholas Spiro is a partner at Lauressa Advisory