The Trump stock rally: Averting calamity with a little charm
Posted on November 12th, 2016

Courtesy The Sydney Morning Herald

The stock market is easily rattled, but it can also be easily seduced.

President-elect Donald Trump’s long-term relationship with Wall Street is just getting started, but he has already demonstrated that he can not only shake up but also mollify the market. It soared to a record on Thursday, as Trump was preparing to meet with President Barack Obama in the White House.

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Carl Icahn says the Trump win is a “major step in the right direction” for the US economy.

Consider that through Election Day, the stock market heavily favoured Hillary Clinton for president and that as recently as Monday, the market rose sharply on news that the FBI director, James Comey, had found nothing in the latest batch of Clinton emails to warrant prosecution.

The market’s pro-Clinton bias was glaring on Tuesday night, as evidence of Trump’s strong performance trickled in and Clinton’s chances dimmed.

Shocked by the prospect of a Trump presidency, traders sold off Standard & Poor’s 500-stock index futures contracts as fast as they could, and the market cratered. Within just four hours, by 12:08 am New York time, those futures contracts plummeted almost 6 per cent – a disorderly rout that seemed to predict a calamitous day on Wall Street.

Smooth bromides

Then Trump proceeded to charm the market, which remained in his thrall through Friday.

t started shortly after 2 am, when Clinton telephoned him and conceded defeat. Soon afterward, appearing before cameras, Trump spoke calmly and graciously, saying that Americans owed Clinton “a major debt of gratitude for her service to our country,” and appealing to her followers: “I’m reaching out to you for your guidance and your help so that we can work together and unify our great country.”

Prices rose as Trump read smoothly from a teleprompter, uttering familiar bromides. When he is president, economic growth will double, he proclaimed. America’s interests will come first, but other countries will be treated fairly.

Mollifying the market: Investors had favoured Hillary Clinton, but sentiment turned quickly after Trump read his first ...
Mollifying the market: Investors had favoured Hillary Clinton, but sentiment turned quickly after Trump read his first statements from the teleprompter. Photo: Bloomberg

Then came one of the central points of his still nascent economic program, one that came naturally to a businessman who grew up in the New York City construction industry. “We’re going to rebuild our infrastructure,” he said. “And we will put millions of our people to work as we rebuild it.”

Trump hasn’t issued many more specifics than that since his election victory, though he has set up a transition team website that contains some broad policy statements, including a call for $US550 billion to be spent on roads, rail, airports and other infrastructure. But he has been consistently courteous, perhaps startlingly so, for those who were expecting a more bombastic persona.

"A very good man": The President-elect Donald Trump and President Barack Obama at their first meeting.
“A very good man”: The President-elect Donald Trump and President Barack Obama at their first meeting.  Photo: AP

On Thursday, for example, after meeting with Obama, Trump told reporters that the president, whom he had vilified during the campaign, was actually “a very good man” and said it was “a great honour” to meet with him. Obama responded in kind, saying they had an “excellent meeting.”

The bar is low

Words like these have been more than enough to buoy the US sharemarket – and global markets followed. On Thursday, the Dow Jones industrial average rose to record territory and climbed further on Friday. But the Trump rally started earlier, in the wee hours of Wednesday morning. By the time that trading day ended in New York, the futures market had risen nearly 7 per cent, an extraordinary ride.

There are plausible explanations for this performance. One is that strategists set the bar so low for Trump that the mere appearance of normality has been enough to keep the bears at bay. Until Trump’s actions and intentions are clearer, many strategists have simply decided to wait and see.

“I’ve found that making an immediate response to news invariably leads to a bad decision,” said Laszlo Birinyi, a veteran independent market strategist, who was cautiously bullish on stocks before the election, and remains so. “I haven’t made any changes so far.”

There are more emphatic reasons for the market’s complaisance. Jim McDonald, chief investment strategist for Northern Trust, said he viewed the election results mainly as “a Republican sweep of the White House and Congress” rather than a Trump victory.

“Our view is that we will have unified government for the first time in six years,” he said, and with less gridlock in Washington, “that means that we will have some pro-growth policies being implemented.” Less financial regulation and less health care regulation and perhaps an end to Obamacare are the “plump targets out there,” he said, adding that he expected to see tax cuts.

Great expectations

In a similar vein, a survey of 114 global fund managers on Wednesday by Bank of America Merrill Lynch Global Research found that most of these professional investors thought Trump would probably soon reach an agreement to repatriate some of the US corporate money stashed overseas and increase spending on those infrastructure projects.

Most said they didn’t expect to reduce risk in their portfolios by raising cash. The single most attractive option for the group was to invest in the S&P 500.

McDonald said he expected that new programs and tax cuts would effectively be a fiscal stimulus that should increase the gross domestic product by about half a percentage point, making company shares more appealing. Bonds, by contrast, are likely to be hurt by an increase in inflation, he said. Bond yields have already risen, and prices, which move in the opposite direction, have fallen.

There is also some historical backing for a bullish view on the election’s stock market impact. Since 1901, stocks have flourished when one party has controlled the White House and both houses of Congress, data from the Bespoke Investment Group indicates. When Republicans have ruled, the Dow has gained 8 per cent a year, on average, compared with 6.2 per cent for all political configurations. (When Democrats have held the White House and Congress, stocks have gained 7.9 per cent a year.)

‘Manic market on medication’

Yet the Trump rally has already spawned concern that things have gone too far.

“These gyrations and inconsistent behaviour attest to a manic market on medication,” said David A. Rosenberg, chief economist and strategist at Gluskin Sheff, in a note to clients.

Even if the market’s infatuation with Trump lingers, to predict rosy days ahead, you have to make assumptions, and some of them may be a stretch. Make your own list.

Here are a few suggestions, just to get started:

  • Trump will always be a calm and soothing presence and will not lead the country into major crises
  • he will smoothly conclude legislative deals with conservative congressional Republicans for whom policies like deficit spending are anathema
  • his avowed “America first” policies will not severely damage emerging market nations or start debilitating trade wars or otherwise destabilise the global economy
  • he will appoint effective Federal Reserve Board members; and his plans to deregulate industry and dismantle the Obama legacy will benefit the economy and the markets.

That and more could all happen, but these are early days.

We will simply have to watch the Trump presidency unfold.

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