Comparisons are being made with Brexit, if only for the unreliability of public polling. Financial markets swung wildly in response to unfolding developments. As the counting progressed and Trump’s chances improved, so equities, the US$ and bond yields all fell, while safe haven assets such as gold, Yen and the VIX rallied. However, the tone of Trump’s victory speech surprised the markets, leading them to quickly reverse the previous price action.
Further, the fact that the Republicans achieved a clean sweep of the Congress as well as the Presidency – something neither party was expected to achieve. This is important because it raises the possibility that something will actually get done in the US for the first time in years. The Obama Administration has been hamstrung by a Republican-controlled Congress, but that impediment is now gone. Or is it? Will the new President also find himself hamstrung by Republicans who do not like him?
This is a difficult question to answer because the election campaign has been dominated by a tone and rhetoric not seen in living memory. How much of Trump’s bluster was for the sake of getting elected and how much does he really intend to do? How much will his own party, which does not like him, let him do? Will he really be as wild and unpredictable as he was in the campaign? It is very hard to answer these questions now, but we suspect the reality of President Trump will be less wild than the rhetoric of Candidate Trump. There will be moments of surprise and worry, but it is still early days and we should not get too concerned for now.
Trump’s campaign pitch included promises of:
The reason why financial markets have reacted more positively after the initial shock of the result is that these economic effects would likely provide the circuit-breaker the US needs to lift growth out of the rut it has been in over recent years. There is much talk of the ineffectiveness of monetary policy and that central banks can do no more to help growth - the best monetary policy can do is support the current pace of growth and inflation with some redistribution at the margin between countries via exchange rate movements. Fiscal policy is seen as the way to break this gridlock and lift the global economy to a stronger growth path. This is what Trump policies offer the US. Furthermore, the proposed business tax cut would boost corporate profitability and equity valuations.
However, there are some important caveats:
The essence of Trump’s policies are one thing, the size of them is another – moderate versions would be more pragmatic and digestible. Achieving this will be a challenge for Congressional Republicans.
We do not expect the new Administration to interfere with the Fed, although they may move quickly to fill the two vacancies on the Board of Governors and Janet Yellen is unlikely to be re-appointed in 2018.
A combination of stronger US growth and a stronger US$ is potentially good for the global economy as a whole. This would amount to the US exporting reflation to the rest of the world, as long as Trump’s trade policies do not cut too far into global trade flows. European equity markets would likely benefit more than Emerging equity markets, which typically underperform when the US$ rises.
How might all this impact investors in Australia?
It is far too early to know for certain how all these forces will play out. So far the markets have taken a more optimistic view, but we are still only a few weeks past the election and there is still plenty of time for second and third-guessing of the situation. Surveys of global investors suggest the recent price action reflects tactical risk-on adjustments rather than fundamentally-based changes to portfolio allocations.
It will be important to watch what Trump tries to achieve in his first 100 days. More uncertainty and volatility are probably the most reliable forecasts to make at this stage. For the first time in US history, the President will be someone with no experience in governing or leading the military. Time will tell whether this proves to be a good or a bad development.