So far, so good. Wall Street was among the keenest backers of Hillary Clinton in her doomed attempt to win the White House — but now seems to have fallen in love with President Trump. Equities have been on a tear since election night and as the new administration takes shape, the reasons for the market’s euphoria are clear enough. A splurge of infrastructure spending, combined with cuts in corporate taxes and a rollback of regulation, may be just the boost America’s economy needs.
There’s a catch, however. The Trump bump isn’t likely to last. In fact, it could quickly turn into the Trump slump. Why? Because the Donald’s chaotic approach to government is unlikely to get results; because the dollar is likely to come under pressure; and because there’s a real risk of paralysis, not to mention possible impeachment. The smart money should think about getting out while the going is good.
The rise in both Dow Jones and S&P 500 indices in the weeks between Trump’s election and his triumphal arrival in the White House was not quite the strongest of the past hundred years. That prize is held by Herbert Hoover, who heralded a 13 per cent jump in equities between November 1928 and January 1929 — and we all know how things worked out when the Great Crash arrived that autumn. Even so, Trump’s has been a remarkable surge, especially given that Wall Street was already in the seventh year of a bull market.
The reasons are not hard to figure out. Investors may not like Trump’s manner but that doesn’t mean he doesn’t have some good policies. He wants to cut America’s corporate taxes, which are currently the third highest in the world after Chad and the United Arab Emirates. He wants to spend billions on infrastructure that is in desperate need of repair and improvement — the kind of fiscal boost that can’t do any harm. And he wants to slash red tape that has started to make France look like a free–market paradise.
That mix of policies may well give the US economy a much-needed shot of dynamism. The markets clearly think so. The trouble is, once Trump is firmly established in power, none of this may be enough to sustain the rally — and it could easily be thrown into reverse. Here’s why.
First, the American tax code is even more ridiculously complex than ours. It is full of weird and wonderful breaks: a company can deduct the cost of handing out free beer to its customers, for example, but not whiskey. Between 2012 and 2016 one new rule was added to the tax code every day. Simplifying that will be a vast task, and will be met with a blizzard of objections from powerful special-interest groups. Even the most experienced wheeler-dealer on Capitol Hill might find it impossible to put into practice.
With no experience in government, little genuine support in the Republican party and a habit of making new enemies, it seems unlikely Trump will achieve it. He can talk a good talk, but in this respect the walk is likely to be disappointing.
Next, the dollar is already close to an all-time high. On a trade-weighted index it has hit 103, compared with 80 back in 2011. It has not climbed back to the 1985 peak of 128, but by historic standards it is already very strong. To stand any chance of reviving industry, as he had promised, Trump will have to bully the currency down. We have already seen some of that in his aggressive soundbites about Germany’s trade surplus and we are likely to see a lot more in the year ahead.
Don’t be surprised if he tries to hustle the Federal Reserve into intervening in the markets to depreciate the dollar. That means investors outside the US will take a hit. Even if the stock market treads water, any UK investor in American shares or funds will still lose out if the currency falls against sterling.
Finally, there is a real risk of scandal and paralysis. Trump has come into the White House with five decades of colourful deal-making behind him; he’s on his third marriage and has met a lot of other ladies along life’s path. He probably has more baggage than any previous incumbent. The chances of him getting through a full term without a major scandal are close to zero — and possibly worse. Bookmakers are offering odds of 2-1 on his being impeached, down from 4-1 before he took office.
That feels about right. At some point, he may become bogged down in the kind of drawn-out hearings that make it impossible to get anything else done: even Bill Clinton, wiliest of political operators, achieved little in a second-term that was plagued by scandals. It’s true that Trump’s vice-president Mike Pence is a more conventional, pro-business conservative, who Wall Street wouldn’t mind taking power. But years of uncertainty would disrupt the markets.
There are other factors at work as well. Historically shares have done better under Democratic than Republican presidents; they almost doubled under Obama. More worryingly, Trump is taking office, much like Herbert Hoover, on the back of a long bull market. The surge in stocks that started in 2009 is already the second longest in American history, bested only by the run from 1987 to 2000.
That doesn’t mean a crash is inevitable before 2020. The upswing could carry on until 2022 without breaking the record. That said, the older the bull market gets, the higher the possibility of a setback becomes.
American stocks have done well in anticipation of President Trump. But it’s a fair bet that they are likely to do worse once the novelty wears off and reality sets in.