Obstacles Ahead for Trump Driven Markets

Donald Trump’s dramatic victory last week in the US presidential election was further accentuated by his Republican Party retaining majority control in both chambers of Congress. This provided some post-election confidence to US markets and the dollar, despite investors’ ongoing skittishness over Trump’s unpredictability.

Though markets plunged sharply during the course of election night when it became apparent that Trump could actually win, the next few days saw a sharp recovery as US stocks hit record highs and the dollar surged against its rivals. Helping to boost markets after the surprise political outcome was an abrupt turn in market sentiment that began to focus more on the potentially beneficial aspects of Trump’s economic positions over the factors of uncertainty associated with him.
 
More specifically, Trump’s stances on increased infrastructure investment, financial deregulation, corporate tax cuts, and a focus on the revival of US industrial growth, can all be considered immediate market-positives for both US equities and the US dollar. In addition, expectations that Trump will increase fiscal spending and stimulus, which should also lead to climbing inflation and higher interest rates, has helped to boost the dollar and financial stocks while placing heavy pressure on gold prices.

With respect to interest rates, the relative lack of post-election market volatility so far is likely to help the Federal Reserve commit to raising rates in December, as has been highly anticipated for months. With election risk now out of the way and the world still intact after Trump’s win, the Fed currently has yet another green light to hike rates. On Thursday and Friday, two key Fed members – St. Louis Fed President James Bullard and Fed Vice Chair Stanley Fischer – echoed each other’s comments when they separately talked about the likelihood of a near-term rate hike but also said that interest rates would remain low for an extended time. With Trump entering office in January, this “lower-for-longer” stance may potentially change if inflationary pressures rise as expected under a Trump Administration.

While Trump’s effect on markets after his victory has thus far been generally positive, other possible implications of his policy stances could potentially derail market gains and impose significant obstacles to continued strength for the US dollar and equity markets. Trump’s proposals regarding substantial tax cuts and heavily increased expenditures on infrastructure, among other key policies, are likely to exacerbate an already-massive national debt and weigh on the US economy as a whole. In addition, Trump’s key campaign promises regarding global trade, which advocate strict protectionist policies particularly with respect to China and Mexico, could ultimately prove to hinder US economic growth and place increased pressure on US financial markets. Some have also previously warned that several of Trump’s economic policies could ultimately lead the country into recession.

These concerns have not yet significantly affected market strength, as post-election market optimism continues to run high. For the latter half of last week, this optimism has been fueled primarily by strong expectations for Trump’s pro-business and fiscal spending stances. For now, the “Trump Rally” with respect to the dollar and US equities continues. EUR/USD has plunged to new long-term lows as USD/JPY has risen to new highs. At the same time, gold prices have taken a steep dive.

Going forward, however, the unknowns surrounding President-elect Trump continue to swirl, and the real question remains as to whether Trump will follow-through on some of the more extreme issues he espoused during his campaign. If so, rallying equity markets and the US dollar could potentially see a sharp pullback, while heavily-besieged gold prices could experience a strong comeback.