FIVE THINGS TO WATCH UNDER THE TRUMP REGIME.
Trade strife, inflation a few early concerns
Well, it is official. Donald Tr u mp is now president of the United States. The sun still rose, the birds still sang, and the stock market has not — at least yet — completely collapsed. Investors have been stunned both by his November election victory and the “Trump rally” that followed.
Certainly, investors appreciate s eeing an “expected” 20 per cent drop turn into a 20 per cent or more gain.
If the Trump rally does not convince you of the folly of trying to predict the stock market, then I guess nothing will. We are not particularly concerned about t he state of t he market right now. Over the years, the one thing we have noticed is that there is always something to worry about in the stock market. If not Trump, then it would have been something else, such as earnings, interest rates, Greece or Brexit. As mentioned in the past, when the time comes when there is nothing to worry about, then that is the time you should most worry.
Let’s look at five things at least to be on the watch for, now that the U. S. has a new boss:
TRADE WARS
Trump will likely come out swinging on this topic, with a border tax on imports or other strategies to help create U. S. jobs. Manufacturing companies will be impacted ( think auto companies) and we would not hold out high hopes for a peaceful resolution on the current lumber dispute. Of all Trump ideas, we really think this is the worst. Nobody wins in a trade war, and they have been blamed for recessions ( or worse) in the past. China has already indicated it will retaliate. The result might simply be higher prices for everything, and nobody wants that.
DRUG STOCKS
One tweet from Mr. President is enough to send the biotech index down five per cent or more. As if the sector wasn’t volatile enough, investors now need to worry about tough talk from the president on drug pricing. Of course, a few bad apples in the business have ruined it for everyone. But to continue advancing research, companies need to make money. It can take 15 years to get a drug from the development s t age to t he market. Without decent pricing, many drug companies might instead simply buy back stock or pay dividends, without investing for the future. Again, not the best long- term scenario for the sector, nor patients.
EARNINGS GROWTH
One reason for the Trump rally was that investors assumed his pro- business policies would be very good f or c orporate e arnings growth. Earnings growth has slowed of late, and is dipping into negative territory year- over- year. But if companies start investing in infrastructure and technology, and jobs are created and housing stays strong, there very well could be a corporate earnings reversal. This could keep the market rally going for some time.
I NFLATION
This is another big worry for us. Trump wants U. S. jobs, and that’s a noble goal. However, at 4.9 per cent, the U. S. unemployment rate is already very low. What happens if more jobs are created? Well, the labour market could get tighter and employees might start demanding pay raises. If this combines with higher prices on i mports, t hen guess what? Inflation could suddenly pick up rapidly. Investors have not had to contend with inflation for more than a decade, and it might shock them if it comes back.
VOLATILITY
Markets, considering the power transition that has occurred, as well as Brexit, terrorism and other factors, have been remarkably quiet. The VIX volatility index stands at 12 or so, and investors seem very complacent to us. We imagine it is just a matter of time before “something,” be it Trump-related or otherwise, spooks the market. It’s been months and months since we have had a big drop. Of course, with market gains, 200 points is not what it used to be. But rest assured at some point fear is going to come back into the market. This does not mean you actually need to do anything, but it is better to prepared, nonetheless, so when it comes you won’t be one of those investors who are panicking.
Trump might be smarter than he comes across as. Or, maybe not. Either way, he is here for four years, at least, and investors at least need to get ready for some changes.