William Bourne considers what Trump means for markets
The American electoral system may be flawed but Trump’s victory has delivered a clear vote for change. The fact that markets reacted calmly to the news doesn’t mean the implications are fully priced in. As with brexit, the average American has delivered a message to the political establishment that current policies are not working for them. In passing, I would comment that, whatever the nastinesses of the campaign, if it delivers change in a peaceful way this is democracy working well.
So, what might that change be?
First, it surely presages the end of what is known in the market as the ‘Greenspan put’ - ie. when markets wobble, the lifeboat will arrive with a dose of QE. It happened in 1998 (Russian crisis), 1999 (Y2K), 2002 (recession), and several times following the 2008 financial crisis. Trump has, not wrongly, identified this as a major reason why the average American has got poorer while the richest have got richer. The implication of the removal of this lifeboat is that risky behaviour will once again be punished and investors will demand a higher risk premium for investing.
Second, Trump, like Abe in Japan, has been elected to get America working again. To achieve this, he has already said that he will use fiscal policy by boosting infrastructure spending and cutting taxes. He may or may not be able to achieve everything he has promised but he will be pushing on an open door. China, Japan and likely the UK are all moving in the same Keynesian direction, so he will not meet great opposition.
His comments in the election campaign have, on the other hand, raised the fear of an inward-looking US. Although the Trans-Pacific Partnership was probably dead already and countries like the Philippines have unsurprisingly moved closer to China, if a Trump presidency means the reversal of the 30 year trend towards greater globalisation, it will be a major negative for economic growth everywhere and, therefore, markets. Remember, that the US, with many of its major corporations now effectively global in nature, also has much to lose. While it is likely that the US will rein in its global ambitions, a repeat of 1930s protectionism is very much a worst case scenario.
The combination of greater borrowing and a less global US is almost certain to boost inflationary expectations, although this would probably have happened under Clinton too. Bond yields have been rising since-mid August and a Trump Presidency has the potential to accelerate the trend. If this has the effect of returning markets to a more normal state, where money has a value rather than being free and risky behaviour has a downside as well as an upside, it is to be applauded.
So bonds, equities or cash over the next four years? Well, the first two are expensive, at least in aggregate, while the last gives scant returns. Both bonds and equities look ripe for some downward re-pricing to reflect respectively higher inflation and greater uncertainty. On the other hand, many institutions are sitting on cash and any market downturn may be limited by that. There are also important bits of the jigsaw missing: we don’t know who Trump will appoint to his team nor whether he will govern for ‘all America’ as he says. Perhaps the best advice in the short term is to do nothing precipitate.