When it became clear that Donald Trump was going to win the US election, stockmarkets panicked.
“Trump has won, the world is going to end” seemed to be the message.
But then we got a reversal that surprised everyone, including your author. Stocks not only rallied, but broke out to all-time highs, while gold ended the day in the red.
That trend has not stopped. Stocks have roared higher. Interest rates have roared higher. Base metals have roared higher. Gold has drooped.
So the question is: are these trends here to stay?
Donald Trump’s grand plan
The reversal of the panic in markets began with Trump’s victory speech. Sounding rather like Franklyn D Roosevelt describing his New Deal, Trump declared:
“We are going to fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools, hospitals. We’re going to rebuild our infrastructure, which will become, by the way, second to none. And we will put millions of our people to work, as we rebuild it.”
Trump has shown many two-faced traits. He’s going to lock Crooked Hillary up, she’s “guilty as hell”. No he’s not, he’s going to forgive her. The New York Times is “failing” and “nasty”. No, “it’s a great American jewel”.
But, in this case, I think we can take him at his word: he is planning a huge infrastructure programme – a Keynesian reflation of the economy.
The response to the financial crisis of 2008 – printing money and slashing interest rates – benefitted Wall Street, but not Main Street. Trump wants Main Street to get its slice of the pie. Infrastructure spending is one way he plans to do that.
Another is via lower taxes. It’s likely that there will be considerable corporation tax cuts. Estate tax (inheritance tax) will go. Income tax will be simplified. There will also be a deal of some kind to lure the vast sums of money that US corporations hold offshore back into the US where it can be re-invested. One way or another, tax cuts are coming.
Another area that Trump has spoken out against and another area where we can expect to see cuts is in regulation. Already Trump has shown a disdain for doing things by the book.
Rather than make official public statements, he goes on Twitter. Rather than organise official state visits, he says to Theresa May, “If you travel to the US, let me know”. Nigel Farage, who holds no official office, was one of the first foreign politicians he met in person. These are the actions of a man who has little time for traditional bureaucracy.
Quite where the money is going to come from is not clear – more debt, I expect. The size and unpayability of US debt – currently nearing $20trn, having almost doubled under Barack Obama – has not bothered the markets until now (government bond prices have been getting lower for the last 35 years). So perhaps US debt will continue not to matter.
The reflationary trend was in place before Trump came along
So that’s Trump’s plan. And regardless of what you think of the man, an economic strategy based on a huge reflation, lower taxes and less regulation means we can expect certain trends going forward.
We can expect to see some inflation. Interest rates, for the first time in yonks, should creep up. This trend actually began in the summer, before the markets even considered Trump a serious contender for the White House. And unless there is a crisis rush into bonds, it should continue.
Domestic companies in any way connected with infrastructure should benefit – railways, builders, haulage companies, cement companies. And the rally that has begun in base metals, plus other key infrastructure commodities and their associated companies, should continue as well.
We should see a period of increased lending, too. So banking stocks, which have been (on a relative basis) awful since 2009, should also benefit.
But this is not all about Trump. I think this is a tide in the affairs of men, to borrow somebody else’s phrase. UK gilts have been losing value just as sharply as US Treasuries. Ordinary British people are as sick of the City as Main Street is of Wall Street. And politicians feel the need to do something about it.
Both Theresa May and Philip Hammond have laid the ground for more infrastructure spending, while demand for low-cost housing is getting stronger still.
So we can expect to see rising rates here too, as well as rising prices in certain infrastructure-related companies. Financials should do well too – we might see some increased lending as inflation starts to pick up. Banks have already woken from their slumber and that should continue – Lloyds, HSBC, Barclays – even that perennial dog, RBS.
A salutary lesson from Ronald for Donald
The markets have already moved. This trend is already well in place. Part me of me thinks, if anything, too much of what I have described is already priced in and that we need a pullback. But that might just be the standard fear one feels in the face of a bull market.
But here’s something to confuse you: numerous parallels have been drawn between Trump and Ronald Reagan. What about this one?
In November 1980, in the weeks that followed Reagan’s election, the S&P 500 broke to a new high amid all the excitement. However, a peak was reached at the end of that month.
An 18-month bear market followed, during which the S&P 500 lost 30% of its value. It wasn’t until late 1982 that those post-election highs were re-tested and broken.
The first two years of a new presidency are not usually good ones for the stockmarket. The markets have to absorb the tough medicine that a new administration wants to implement, before the more generous policies start creeping back in to buy popularity before the next election.
So perhaps, come 2017, the markets won’t be so enamoured with Trump. Perhaps he won’t be able to get things done as easily as anticipated. Perhaps his inconsistency/tendency to outright contradict himself will land him in trouble.
Perhaps he won’t be able to get his tax cuts through, or his infrastructure plans will be blocked or marred by incompetence or corruption. Perhaps rising rates will cause a problem. Perhaps the left will exploit this conflict of interest between his new role and his business interests. There is a lot that can happen.
If 2017 is half what 2016 has been, there’s still plenty in the pipeline. With Trump there and Brexit here to look forward to, I don’t think we’ll be short of excitement. (As John said yesterday, we’ll be covering it all in next week’s special forecasts issue of MoneyWeek magazine. If you’re not already a subscriber, sign up for it right now.)
For now though, I’ll stick with the trend. And the trend is up.