Why the markets love Trump

Since Donald Trump was elected president of the US on November 8 last year, the S&P 500 has gained around 6.5%. Over the same period, the MSCI World Index is up over 3%.

This has not been the reaction that many analysts were expecting. In the run up to the election, some economists were predicting that a Trump victory could cost the S&P 500 between 7% and 10%.

This even seemed to be materialising when there was a sharp drop in the market after the election result became known. However, it was quickly reversed and has turned into a sustained rally. The market, it seems, very quickly changed its mind about what it meant to have Trump in the white house.

“There are really three pillars to Trump’s approach that the market has reacted well to,” explains Cai Rees, client investment strategist at global asset management firm SEI Investments. “Those are tax cuts, deregulation and government spending.”

Essentially, if these are implemented, they will all be good for company earnings and the broader US economy. And that means higher equity returns.

“Trump is talking about dropping corporate tax from 35% to 15%,” Rees says. “That is at the level of places like Taiwan and Ireland and other low-tax jurisdictions. And that 20% drop in tax would be a 20% increase in earnings right away.”

In terms of deregulation, Trump has talked about rolling back some of the restrictions on banks, which will free up their balance sheets and allow them to lend more. He also wants to cut back on the red tape around doing business, especially for start-ups and smaller companies.

He has also earmarked one trillion dollars to spend on infrastructure projects.

“Most economists will agree that the fastest way to grow your real economy is through infrastructure spending,” says Rees. “So this would provide a bump that could last a few years.”

That is the good story that the market has been reacting to, and on its own it would be a very good story. However, as Rees acknowledges, it also comes with “the rest of Trump”.

That is the bungling, the protectionist rhetoric, and the general lack of any coherent strategy. In other words, Trump also comes with an enormous amount of uncertainty. And that begs the question whether this won’t in time over-shadow the short-term benefits of his administration’s pro-business moves.

“You can’t not summarise the temporary travel ban as being very amateurish in appearance,” Rees says. “Most politicians wouldn’t be able to get away with being so amateurish. But the way he came into power was saying he doesn’t have the experience or skills of a career politician, so ultimately they will forgive him a few times for making these amateur mistakes in terms of implementation.”

News that Trump has drafted another executive order that will target the visa-work programmes widely used in Silicon Valley have also been met with alarm. The order will apparently force the likes of Apple, Microsoft and Amazon to prioritise hiring American workers.

“These companies rely heavily on high-skilled immigrants, and you are already seeing some of the main tech players coming out to say that they would fight this ban,” Rees says. “They are against immigration restrictions.”

These are the kinds of things that would introduce uncertainty into the US business environment. But even more concerning would be if Trump’s rhetoric on China led a trade war.

“These are the world’s two largest economies,” says Rees. “It’s very difficult for them to put up trade barriers against each other without that spilling over into the rest of the world.”

Ultimately, it’s still far too early to say whether the “Trump bump” in markets will last, but Rees remains cautiously optimistic.

“People are asking how far the rally can go and whether it shouldn’t be pared back by the uncertainty,” he notes, “but at the moment we don’t see any reason to think that the economy can’t grow well because of these policies on aggregate.

“But these are the questions that need to be answered,” Rees adds. “Is Trump’s style eventually going to outweigh any of the things to do with deregulation, tax relief and infrastructure? And in particular everyone is watching carefully what happens between the US and China.”

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