Sus­tain­ing the Trump rally

Financial Mirror (Cyprus) - - FRONT PAGE -

Don­ald Trump’s vic­tory in the United States’ pres­i­den­tial elec­tion sur­prised most of the world. But the pres­i­dent-elect is not fin­ished de­fy­ing expectations. Con­trary to the pre­dic­tions of many ex­perts, stock mar­kets have ral­lied strongly since his vic­tory, with the three ma­jor US in­dices reaching record highs while the dol­lar has soared. Ex­plain­ing th­ese un­ex­pected re­sponses could pro­vide a glimpse of what the next few months have in store for mar­kets.

Be­fore the elec­tion, most an­a­lysts pre­dicted that a Trump win would trig­ger a large stock-mar­ket sell­off and a rush into low-risk gov­ern­ment bonds. And, in­deed, when the re­sults be­gan rolling in, that is what hap­pened, be­gin­ning with Trump’s dra­matic vic­tory in Florida and gain­ing trac­tion as his lead in the Elec­toral Col­lege grew. By the time that lead ap­peared in­sur­mount­able, the Dow Jones in­dex of US stocks had fallen by 800 points, and the broader S&P 500 was “limit down.” More­over, the dol­lar be­gan to slide, and a flight to qual­ity in US Trea­sury mar­kets caused bond yields to plum­met.

But mar­ket pes­simism did not last long. Soon af­ter the pres­i­dent-elect de­liv­ered his ac­cep­tance speech in New York, at nearly 3 a.m. Eastern Stan­dard Time, stocks be­gan to rally – and have ever since, help­ing to boost risk as­sets around the world. With cap­i­tal pour­ing into the US, the dol­lar strength­ened to levels not seen for some 13 years.

In ad­di­tion, many in­vestors have aban­doned the safety of gov­ern­ment bonds, trig­ger­ing a spike in in­ter­est rates even more pro­nounced than dur­ing the 2013 “taper tantrum” that fol­lowed for­mer US Fed­eral Re­serve Chair Ben Ber­nanke’s state­ment that the Fed in­tended to wind down its liq­uid­ity sup­port. Mar­kets are now all but cer­tain that the Fed will pur­sue an in­ter­est-rate hike next month.

The most likely ex­pla­na­tion for the turn­around lies in Trump’s post-elec­tion re­marks, which have fo­cused largely on his eco­nomic agenda’s pro-growth fea­tures, such as dereg­u­la­tion, cor­po­rate-tax re­form, and in­fra­struc­ture spend­ing. Since the elec­tion, Trump has mostly avoided talk­ing about his trade-pro­tec­tion­ist cam­paign pledges, such as i mpos­ing pun­ish­ing tar­iffs on China and Mex­ico, dis­man­tling the North Amer­i­can Free Trade Agree­ment (NAFTA), and re­scind­ing Amer­ica’s bi­lat­eral trade agree­ment with South Korea. Though he has re­it­er­ated his pledge to with­draw from the Trans-Pa­cific Part­ner­ship, that deal had not yet been rat­i­fied, any­way. And he has also cho­sen not to re­peat his crit­i­cisms of the Fed and its lead­er­ship.

This shift in fo­cus has con­vinced mar­kets that Trump may well de­cide not to fol­low through on the more growth­dam­ag­ing mea­sures he sug­gested dur­ing his cam­paign. Trump has be­come far more con­cil­ia­tory as well, telling the New York Times that he did not want to “hurt the Clin­tons” by ap­point­ing a spe­cial pros­e­cu­tor to in­ves­ti­gate his for­mer op­po­nent. Sim­i­larly, af­ter years of crit­i­cis­ing Pres­i­dent Barack Obama, Trump has spo­ken pos­i­tively – even glow­ingly – about him.

Sim­i­lar ten­den­cies can be seen in Trump’s ap­proaches to his Re­pub­li­can cam­paign op­po­nents, in­clud­ing House Speaker Paul Ryan and one of Trump’s most out­spo­ken Re­pub­li­can de­trac­tors, for­mer Mas­sachusetts Gover­nor Mitt Rom­ney. Given that Repub­li­cans won a ma­jor­ity in both houses of Congress and gained fur­ther ground at the state level, Trump’s dé­tente with the party es­tab­lish­ment bodes well for the en­act­ment of his pro-growth poli­cies.

Of course, to make faster and more in­clu­sive growth a re­al­ity, thereby val­i­dat­ing ex­u­ber­ant mar­kets, more will be needed – namely, care­ful de­sign, broad po­lit­i­cal buy-in, and sus­tained im­ple­men­ta­tion. More­over, the team that will over­see that process has yet to be se­lected; like other ap­pointees, its mem­bers could well face long vet­ting pro­cesses and, in some cases, con­fir­ma­tion chal­lenges in the Se­nate.

Once the team is in place, its mem­bers will need to fig­ure out how to make Trump’s plans work for an econ­omy that has – by ne­ces­sity, not choice – been ex­ces­sively re­liant on un­con­ven­tional mone­tary poli­cies. The plan must recog­nise that, dur­ing this pro­tracted pe­riod of mone­tary ex­pan­sion, both fi­nan­cial mar­kets and re­source-al­lo­ca­tion have been dis­torted, wors­en­ing wealth in­equal­ity.

The good news is that the in­com­ing ad­min­is­tra­tion can draw on mea­sures that were for­mu­lated dur­ing Obama’s ten­ure, but which gained lit­tle trac­tion be­cause of the highly po­larised and dys­func­tional con­gres­sional pol­i­tics that char­ac­terised most of Obama’s eight years in of­fice. Such mea­sures ad­dress im­per­a­tives such as in­fra­struc­ture in­vest­ment, tax re­form, and job cre­ation.

But, of course, the US does not ex­ist in a vac­uum. Ex­ter­nal chal­lenges must also be over­come – or, at least, con­tained – if the pres­i­dent-elect is to ful­fill mar­kets’ expectations. De­vel­op­ments in Europe, which faces a se­ries of po­ten­tially desta­bi­liz­ing po­lit­i­cal events in the next few months, will be par­tic­u­larly con­se­quen­tial.

Italy is about to hold a con­sti­tu­tional ref­er­en­dum that could re­sult in the fall of Prime Min­is­ter Mat­teo Renzi’s gov­ern­ment. The United King­dom has to pro­duce a plan to guide a cred­i­ble and or­derly Brexit process. In France, the far­right Na­tional Front’s Marine Le Pen will at­tempt to turn the up­com­ing pres­i­den­tial elec­tion into another anti­estab­lish­ment up­set. And, in Germany, Chan­cel­lor An­gela Merkel will try to po­si­tion her­self to win another term next fall, in an en­vi­ron­ment that has been trip­ping up tra­di­tional politi­cians.

Notwith­stand­ing the risk of in­sta­bil­ity in Europe, Trump is in a po­si­tion not just to help boost growth in the US, but also to make it more in­clu­sive. By pur­su­ing a Con­gress­sup­ported pivot to­ward a more com­pre­hen­sive eco­nomicpol­icy stance, his ad­min­is­tra­tion’s pol­icy surge could also spur the pri­vate sec­tor to be­gin us­ing its large amounts of cash not for short-term fi­nan­cial engi­neer­ing, but for growth-en­hanc­ing in­vest­ments in plant, equip­ment, and peo­ple. If the eco­nomic frus­tra­tion that drove so many Amer­i­cans to vote for Trump is to be dis­si­pated dur­ing his pres­i­dency, and if the mar­ket gains are to be val­i­dated and aug­mented, this prospect must be­come a re­al­ity.

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