Market Run-Up to Inauguration
Market reverberations in the aftermath of the November election have perhaps been most pronounced in the US equity markets and the US dollar, both of which found good reasons to rally on high expectations sparked by Trump’s ambitious economic promises. At the same time, the price of gold entered into a sharp dive as stocks and the dollar rallied, but has recovered much of those losses since the beginning of the new year.
US equity markets, especially, have been enamored with Trump since his election victory, as they have been buoyed to progressively higher all-time highs by bold promises of US economic growth, boosted fiscal spending, lower corporate taxes, and financial deregulation. Meanwhile, the dollar also rose sharply and gold plunged initially on increased interest rate expectations that have been driven in large part by Trump’s well-publicized promises.
Trump’s Promises and their Market Effects
This report will delve into some of those key market-moving promises made by Donald Trump in the extended run-up to his Friday inauguration, and then provide an outlook for potential market implications and challenges after Inauguration Day.
|Key Trump Promise||Effect on Stocks||Effect on USD||Effect on Gold|
|Increased fiscal spending/stimulus – particularly on infrastructure & defense||BULLISH – increased economic growth & industrial production help boost equity markets||BULLISH - increased spending leads to higher inflation & interest rates, pushing up USD||BEARISH – higher growth, interest rates, dollar, and stocks should weigh on gold|
|Lower corporate taxes – down to 15% from 35%||BULLISH – lower taxes increase after-tax cash flow & earnings, and bring income back to U.S.||BULLISH – economic growth through lower taxes & fiscal stimulus boost interest rates/USD||BEARISH – higher growth, interest rates, dollar, and stocks should weigh on gold|
|Financial deregulation – repeal heavy regulations on Wall Street and corporate America||BULLISH – fewer regulatory hurdles increase financial & banking activity, fostering business growth||BULLISH – increased financial activity leading to economic expansion should lift interest rates and USD||BEARISH – higher growth, interest rates, dollar, and stocks should weigh on gold|
|Increased job creation – retain and create jobs in the U.S.||BULLISH – more jobs lead to higher spending and demand, and increased business growth||BULLISH – better employment rate leads to hawkish Fed & higher interest rates/USD||BEARISH – higher growth, interest rates, dollar, and stocks should weigh on gold|
|Protectionist trade policies – tariffs and restrictions on Mexican, Chinese imports and others||BEARISH – restrictions on trade can create trade wars and backlash on US companies doing business abroad||BULLISH against targeted EM currencies, BEARISH overall if trade wars result||BULLISH if trade wars result, which could boost gold as a safe-haven currency alternative|
While Donald Trump has made many other assurances besides the ones noted above, these key promises have been, and should continue to be, the most salient issues potentially moving markets going forward.Market Outlook after Inauguration
As the sharp market moves for the past two months since the November election have been fueled by little more than the abovementioned promises along with a very healthy dose of optimistic anticipation, will the actual inauguration of this brand-new administration bring a reality-check to the markets?
This could very well be the case. From Inauguration Day onwards, the many growth-inducing promises that Donald Trump has made, which have helped equity markets surge to sharply higher all-time highs, will begin to matter much less than the actual actions taken to fulfill those promises.
Markets are typically prone to rise on lofty expectations and fall on less-than-lofty realities. If the realities under President Trump fail to match expectations with regard to fiscal spending, lower taxes, financial deregulation, or other market-related issues, the many investors who have fully bought-in to the “Trump Trade” could potentially be in for a rude awakening.
What makes the outlook for equity markets and the US dollar potentially even more vulnerable to downside risk after inauguration is that much of the soaring market expectations for the incoming Trump Administration have already been pricing-in to the rallying stock market and US dollar for the past two months. The sharp Trump Rally has essentially made the assumption that these expectations will be fulfilled. If any challenges to fulfilling these expectations arise, which should be inevitable in any brand-new administration, the likelihood of market pullbacks, corrections or reversals increase substantially.
The potential challenges for the incoming Trump Administration and the financial markets after inauguration are many. Most of these challenges relate to the new government’s ability to set in motion the actions needed to fulfill Trump’s promises, and the potentially resulting market implications.
|Time to Implement – Even if all of Trump’s market-related promises eventually come to fruition, they are all likely to take quite some time to implement. With everything that Trump and his team wish to do, both on the political and economic stages, many of the promises most anticipated by the markets will likely be placed on the proverbial backburner for the time being, including lowered taxes and financial deregulation.|
|National Debt – Trump’s much-talked-about fiscal spending and stimulus plans will not likely create immediate economic growth benefits, while they are expected to add substantially to the already-astronomical national debt.|
|Congress – All of Trump’s economic policy plans will require close coordination and cooperation with Congress. The good news is that a new Republican majority in both chambers of Congress should smooth out many difficulties. What may be uncertain and potentially challenging is how thoroughly the Republican majority will end up cooperating with Trump in helping to fulfill some of the more controversial aspects of his agenda.|
|Popularity – Trump will enter office as one of the most unpopular presidents in recent history. Latest polls show Trump with an approval rating well below 50%, significantly lower than his immediate predecessors –Obama, Bush, and Clinton – during the same relative period in their presidencies. Weak popular support, if not rectified, may serve as a significant obstacle to accomplishing agenda goals.|
|Media – Trump has a tendency to communicate with the world via often-controversial Twitter comments instead of more traditional media outlets. Indeed, he has maintained a very strained relationship with traditional media, to put it mildly. Without the support of mainstream media, Trump could find it more difficult to find broad-based support for his planned initiatives.|
|Attacks on Business – Trump’s propensity to criticize and attack specific market sectors (like pharmaceuticals and defense in his recent press conference) can place large segments of the financial markets on the defensive. If these attacks continue into Trump’s presidency, equity markets as a whole could be adversely affected.|
|Trade Policies – While many of Trump’s promised economic policies are indeed seen as market-positive, his stances on international trade are widely-viewed as extreme. Trump’s highly protectionist policy positions have the potential to ignite trade wars. This could create a backlash against US companies doing business abroad, and weigh on company revenue and earnings.|
|Higher Interest Rates - As inflation expectations have risen, so have higher interest rate expectations. Rising interest rates may help support the dollar and banking institutions, but they also increase borrowing costs and financing constraints for most other businesses.|
|Dollar Strength – If it continues to rise on higher interest rate expectations, a strong US dollar could serve to inhibit growth of US companies selling goods and services abroad, thereby pressuring equity markets.|
Clearly, there are many valid reasons for the extended Trump Rally recently seen in stocks and the dollar. Most of these reasons are tied to expectations of a business-friendly, pro-growth president in Donald Trump. While these expectations may ultimately be fulfilled, many near-term challenges and obstacles stand in the way of their fulfillment. As a result, the weeks and months after inauguration are very likely to bring significantly increased market volatility – which has been persistently low of late – as the incoming administration is thrust into its new and unfamiliar role. This volatility could indeed disrupt the strongly trending moves seen post-election and pre-inauguration, and should result in a return to substantially wider two-sided swings in equities, currencies, and commodities.