THE HILLARY RALLY
STOCKS HAVE SOARED UNDER TRUMP, BUT HOW WOULD THEY HAVE DONE UNDER CLINTON?
The move higher in stocks since the U.S. election has been labelled the ‘ Trump Rally,’ a burst of market optimism generally attributed to the new president’s low- tax, pro- business and America First policies.
While Trump hasn’t been shy about taking credit for the market’s recent performance, it’s worth asking whether we would be seeing a similar surge in equities had Hillary Clinton emerged victorious on Nov. 8.
Markets have, after all, been pushing higher for years as the U.S. economic picture has solidified in the wake of the 2008 financial crisis. And in the days and weeks leading up to the vote, investors appeared to be indicating a clear preference for a Clinton win, despite her relatively less market-friendly policies.
While the outsized postelection gains in sectors like financials and energy would probably not have been matched if Clinton had won ( her policies favoured tighter regulation on banks and stricter environmental standards for the energy industry), it’s also difficult to envision that there would be anywhere near the level of uncertainty there is today.
It’s hard to imagine, for example, Clinton tweeting criticism about specific companies — something Trump is clearly fond of, and that has caused significant reactions in the stock market.
The press corps would probably be more interested in what the First Man — Bill Clinton — was doing in his spare time, than the admini stration’s dealings with Russia or the prospects of a trade war with China.
So while U.S. equities continue to hit record highs, it is possible the fears hovering over the Trump administration may actually be holding markets back and forcing investors to hold off on deploying capital, as they worry about another surprise decision or damaging comments on issues such as trade, currency markets, or even military action.
“President Trump is unpredictable and he could just as easily cut taxes as he could start a trade war with China, or worse, a real war,” said Matthew Barasch, Canadian equity strategist at RBC Capital Markets.
He noted that investors get the message that tax cuts, deregulation, and infrastructure investment should drive growth and stock markets higher, but the inherent risks related to Trump are keeping many on the sidelines, as are historically high valuations following a sharp rally in the past 12 months.
“There is a fear people have right now that we’re in for a massive Trump correction because of something negative, that Black Swan overhang that wouldn’t have been there under Clinton,” said Angelo Katsoras, geopolitical analyst at National Bank Financial.
He thinks markets would have likely seen a relief rally if Clinton had won, but it would have also probably meant a continuation of the gridlock in Washington that plagued the Obama administration.
Rather than crediting a Trump “hope” trade rooted in expectations of l ower taxes for the gains since early November, a growing number of analysts are suggesting the strength in equities has more to do with factors such as solid job numbers and better- than- forecast fourth-quarter earnings.
Other promising data include new orders in the manufacturing sector, hiring intentions, and lending standards. All of these trends pre- date any effect from Trump, and could continue even if Trump’s growth- oriented policies miss their ex- pected mark.
“The U.S. equity market has climbed on the back of earnings strength, combined with supportive economic data amidst skeptical sentiment,” said Tobias Levkovich, chief U.S. equity strategist at Ci ti group. “Therefore, fears of a major pullback if President Trump does not outline a ‘ phenomenal’ tax program on Febru- ary 28th may be overdone.”
An overhaul of the U. S. corporate tax code would likely include a reduction in the headline corporate tax rate from 35 per cent to as low as 15 per cent — the level Trump is pushing for.
Keith Parker, U. S. equity strategist at Barclays, noted that the S& P 500 rallied 40 per cent in the nine months following Ronald Reagan’s tax cut of 1986, a period that i ncluded a stock market crash. The index climbed more than 50 per cent after the plan was implemented in 1988.
However, he believes the market would price in the benefits much faster this time around, and potentially weaken depending on what the broader tax changes look like.
“The negative effects of a border tax, if one is included, would likely see markets consolidate as EPS would not get much a boost from the plan,” Parker said.
While the Trump plan may not have the advertised effect going forward, it’s clear that markets have been moving for some time.
The S& P 500 may be up 10 per cent since Nov. 8, but it also rose seven per cent between late June and election day.
Optimism about a business- friendly president and Congress has undoubtedly provided a boost, but the latest advance (within the eight- year bull market) was already in full swing — largely due to rising inflation expectations.
There is nothing to suggest Clinton would have derailed this trend, at least not in her first month or two in office, as the Democrat administration was l argely expected to maintain the status quo of her predecessor.
“As we look at the behaviour of the market and economy since mid-year 2016, it’s clear that this reflationary process was already under way prior to Trump’s surprise victory,” said Jonathan Golub, chief equity strategist at RBC Capital Markets.
He noted that the deflationary backdrop in place previously had been putting downward pressure on economic growth, but factors such as the tight labour market has helped reverse that trend, both in terms of inflation and interest rates.
“A market advance based solely on hoped- for, progrowth policies is extremely fragile,” Golub said. “By contrast, we see reflation and an uptick in global activity as the key catalysts behind a more robust rally.”
RISKS RELATED TO TRUMP ARE KEEPING MANY ON SIDELINES.