Donald Trump has been an unpredictable presence in the White House. From rhetoric on trade, to agitating in North Korea, President Trump has seemed to be an unstable hand on the tiller. But markets don’t seem to care. The S&P 500 continues to tick higher. This is in notable contrast to the political discount afforded, until recently, to the Eurozone, and, currently, to the UK. Why doesn’t Trump matter to markets?
The Trump Bump
Stock markets soared when Trump was elected in November last year. The S&P 500 climbed 5% as investors took Trump at his word, believing that he would deliver tax cuts, higher infrastructure spending and economic growth of 4%. This momentum has undoubtedly slowed as investors have realised that President Trump is unlikely to be able to deliver on many of these promises, but US markets continue to climb higher and, until the past few days, had continued to hit new highs.
Equally, many had feared that Trump’s rhetoric would create additional volatility, but this has not happened either. The months since Trump’s victory have been among the least volatile ever recorded on US stock markets, with investors apparently indifferent to the threats to make “America great again” at the expense of international suppliers.
Why are Markets Indifferent?
Investment managers see a number of reasons for this indifference. The first is that many investors simply do not believe Trump. Gavin Haynes, managing director at Whitechurch Securities says: “Stock markets seem to be largely ignoring Trump, believing both his boasts over stimulating growth and threats over military action to be all mouth and no action.”
While US companies have not got the tax cuts they wanted, at least they are not being forced to employ expensive domestic workers rather than importing from abroad. Trump’s inaction has advantages both ways.
There is also the relative strength of the US economy; second quarter GDP growth numbers came in at 2.6%. Haynes says: “There is no sign of the 4% growth promised, but the US economy continues to chug along at a steady level. At the same time, we continue to see inflationary pressures subside.
“With inflation well below the 2% target the Federal Reserve has little excuse to push ahead with further interest rate rises in the short-term. This is resulting in the ‘Goldilocks environment’ of steady growth and interest rates remaining at low levels, which is supportive for equity markets.”
Corporates Continue to Shine
Corporate news has also been largely positive recently with a strong earning season justifying some of the more optimistic valuations that have been seen in the US market. Google’s parent company Alphabet (GOOG), topped analysts already high expectations. Microsoft (MSFT), Ford (F), Coca-Cola (KO) and other US blue-chips have all delivered ahead of revenue expectations. A recent report from Factset showed that with around half of the companies in the S&P 500 having reported their second-quarter earnings, 73% were beating expectations. This was the highest since 2008.
To date, the ‘Trump effect’ has been felt in just one area – the Dollar. The Dollar has been weak for much of this year and economists have attributed this to increasing scepticism over the implementation of President Trump’s pro-growth policies.
Why Brexit is Different
A secondary question is whether markets should be paying more attention to Trump’s rhetoric. Why, for example, have investors been so negative on UK assets with all the political turmoil around Brexit, or on Eurozone assets as populism appeared likely to take hold, but have been agnostic on the potential disruption from Trump?
Ed Smith, asset allocation strategist at Rathbones, says: “Investors don’t care about the political turmoil in the US and they wouldn’t care about the political turmoil in the UK if it wasn’t for Brexit.” He believes markets care about Brexit because it has the potential to cause disruption in the business cycle. It is only when politics intrudes on business activity that investors start to take notice.
Here, he believes investors are being naïve on Trump. He says: “Trump at his most extreme could represent a wholesale change in the way people do business. If he follows through with his protectionist rhetoric – which has been coming back recently – it is something that investors should worry about. It affects companies importing and it deserves a higher discount rate.” He believes investors are being complacent and need to re-think their positioning in the US.
Certainly, the balance in US markets looks increasingly precarious. Markets appear to be assuming that Trump is a lame duck president whose words speak far louder than his actions. If Trump follows through on some of his more disruptive policies, markets may well be forced to reappraise political risk.
