Stock markets are buying what Trump is selling

The president’s optimism about his economic plan is infectious – but it’s an accident waiting to happen

It’s gonna be great … sooo great. Phenomenal, in fact. To cynical Brits, Donald Trump’s promises are, for the moment at least, vainglorious hot air. But there is at least one group that seems to have swallowed the Trump message hook, line and sinker – stock market investors.

Since the Donald was elected, both the Dow Jones Industrial Average and the wider and more representative S&P 500 have surged. On this, as on so much else, Mr Trump has defied predictions. Few believed he’d be elected, but if the unthinkable actually happened, it was widely forecast that markets would crash.

Instead, they’ve seen one of the steepest climbs ever recorded. For once, Trumpian superlatives seem justified; it has been “phenomenal”. Might there be more to the “Trump trade” than just speculative wishful thinking, or are markets once again getting dangerously ahead of themselves?

Somewhat ominously, the only other time when the Dow has reached such new highs on the election of a new president was Herbert Hoover in 1928. It scarcely needs pointing out what happened next: the Wall Street crash of 1929 was followed by the Great Depression.

The circumstances today are admittedly different. We’ve already had the banking crisis that back then was about to engulf the US economy. The Hoover rally was in any case just the final blow-off after nearly a decade of excess. Today, it might be argued, we are still in the recovery phase of the cycle.

Nevertheless, the present outbreak of euphoria contains a number of distinct, bubble-like characteristics. One is the conceit of the new president; when politicians cite the stock market as validation of their own brilliance, as Mr Trump already does, it’s time to start worrying. Those who urge caution are condemned as pessimists, or even accused of a lack of “patriotism”. Negativity is treachery.

Then there are the valuations. The parent company of the still lossmaking Snapchat was this week valued at an astonishing $33 billion when it floated on the stock market. Other loss-making tech companies, such as Uber and Airbnb, are scrambling to follow suit by similarly tapping into today’s almost reckless appetite for high-risk investment. Leveraged takeovers are back with a vengeance, at least in the US, and private equiteers are once again partying like 2007. Almost a decade of ultra-low interest rates has made investors oblivious to the dangers.

And yet … Alan Greenspan, former chairman of the US Federal Reserve, was fond of saying that you couldn’t be certain of a bubble until after it had burst (thanks for nothing, Alan). Certainly, it is possible to argue that far from taking leave of their senses, investors are responding perfectly rationally to what promises to be the most business-friendly presidency since Ronald Reagan. Assuming Mr Trump delivers on his tax-cutting, deregulatory pledges, it would amount to a potentially huge corporate windfall, more than justifying the $2 trillion plus in value that has been added to the S&P since November 8.

There is also an element of selffulfilling prophecy about what’s going on. Already, Mr Trump has succeeded in unleashing the kind of “animal spirits” not seen since before the financial crisis, something that eluded his predecessor. The optimism of investors is proving infectious. Jobs, retail, business investment, business confidence, housing starts, even inflation, all are on the up, and that’s without the new president so much as lifting a finger.

All of sudden, Wall Street financiers no longer feel like pariahs. Instead, they’ve been embraced and invited into key positions in the White House. Oddly for someone who is said to be a “populist”, Mr Trump has succeeded in vanquishing the anti-banker mentality of recent years. People shouldn’t be surprised that credit and business are starting to flow more easily again.

All well and good, then – except for one thing. Markets are leaving themselves virtually no room for disappointment. There is unfortunately a real possibility that, stymied in Congress, Mr Trump will be unable to deliver on his tax-cutting and infrastructure spending plans, or that those plans won’t deliver the growth that markets expect. According to reports, Mr Trump’s yetto-be published budget is predicated on some positively heroic assumptions about the economy. Growth under Obama may have been lacklustre, and largely about recovery from the financial crisis, but already we’ve seen what by historic standards has been a fairly long period of business expansion. Federal Reserve increases in interest rates could all too quickly bring it to a grinding halt.

With Mr Trump, markets seem to be assuming the best of all outcomes; both that he fully delivers on tax cutting and deregulation, as well as increased defence and infrastructure spending, and that wiser counsel prevails on growth destructive plans for protectionist tariffs. If that’s not an accident waiting to happen, I don’t know what is.