How a troubled Trump and surging Wall Street can continue to exist in parallel worlds
What explains the disconnect between Trump’s crisis-ridden presidency and the buoyant mood on Wall Street and is it likely to persist?
The White House and Wall Street may be only 225 miles apart, but they appear to be existing in parallel universes.
It has been almost 14 months since a populist demagogue shocked the world by winning the presidency of the United States.
In the run-up to the election, and in the hours following US President Donald Trump’s upset victory, many investment strategists and commentators warned that the effect of a Trump presidency on financial markets would be devastating.
Paul Krugman, the Nobel laureate, even went so far as to say that markets would “never recover”.
Yet no sooner did Trump clinch the presidency than markets began to rally.
In a sign of the extent to which fears that Trump’s victory would be disastrous for markets were misplaced, the Mexican peso – the financial asset which had the most to lose from Trump’s protectionist and nationalist policies, in particular his campaign pledge to withdraw the US from the Nafta trade accord and build a wall along the US-Mexico border – rose 5.5 per cent against the dollar in 2017, enjoying its best year since 2012.
Indeed emerging markets as a whole have performed strongly since Trump was elected president, with bond and equity funds in developing economies attracting inflows of nearly US$190bn in 2017, the largest inflows on record, according to data from JPMorgan.
Yet is has been in US markets themselves where predictions of a Trump-induced plunge in asset prices proved to be the most erroneous.
The benchmark S&P 500 equity index has surged nearly 30 per cent since Trump’s victory while US stock markets have just enjoyed their calmest year in nearly half a century.
The average level of the VIX Index, Wall Street’s ‘fear gauge” which measures the anticipated volatility in the S&P 500, in 2017 stood at 11.1, according to Bloomberg, a whisker above the index’s historic low reached in early November.
Traders and investors who bet on declines in volatility under Trump, the so-called “short vol” trade, have made a killing.
The absence of volatility and the strong returns across asset classes stand in stark contrast to the political crises engulfing the Trump administration which have contributed to the decline in Trump’s approval rating at 35 per cent, the lowest of any modern US president after his first year in office, according to Gallup.
Only three in 10 Americans, moreover, believe the US is heading in the right direction, the same percentage that approve of Trump’s handling of foreign policy, health care and taxes, according to a separate poll by Associated Press by NORC Centre for Public Affairs Research.
Even Trump’s signature policy – a landmark US$1.5 trillion package of tax cuts passed by Congress just before Christmas – remains deeply unpopular among Americans, with 55 per cent of voters opposing the plan and more than two thirds believing it does more to help the wealthy than the middle class, according to another poll by CNN.
So what explains the disconnect between Trump’s crisis-ridden presidency and the buoyant mood on Wall Street, and is it likely to persist? It’s down to two things.
● First, in the eyes of international investors the first year of Trump’s presidency has been a boon.
Fears that Trump’s protectionist policies – notably his pledge to boost the US’s net trade position through a controversial border-adjustment tax – and his plans to stimulate America’s economy would lead to a sharp appreciation in the dollar never materialised, indeed quite the opposite.
The dollar index, a gauge of the greenback’s performance against a basket of other currencies, fell nearly 10 per cent in 2017, its sharpest decline since 2003, according to Bloomberg.
The so-called “Trump trade”, the surge in the dollar and US bond yields that followed Trump’s election victory, fizzled out at the beginning of last year.
A presidency which many investors and traders feared would lead to a considerable tightening in global financial conditions has in fact contributed to a significant loosening.
● Second, Trump’s policies themselves have had little influence on markets. Accelerating economic growth across the world (particularly in Europe), robust corporate earnings and subdued inflation have been far more important drivers of asset prices in both developed and developing markets.
This suggests that the disconnect between Wall Street and US politics will persist in 2018.
Even the more hawkish monetary policy of the Federal Reserve – which has much more sway over markets than Trump’s presidency – has yet to bring about a tightening in financial conditions.
Krugman’s prediction that markets would never recover from Trump’s victory looks pretty wide of the mark.
Nicholas Spiro is a partner at Lauressa Advisory