As he digests the impact of this seismic change in US politics following the Trump victory, Editor-in-Chief Michael Wilson has his fingers firmly crossed given the uncertainty that lies ahead.
So there we have it. Americans have cast their votes and Donald Trump will become the 45th president of the USA. I can’t pretend that the scenario we have woken up to today is one that I would welcome under any circumstances. However, if nothing else, this year has taught us to expect surprises!
As the next few weeks and months unfold, we will get to learn a lot more about what stance this new president will take and therefore what the impact will be on the global economy as well as stock and bond markets. Will he stick to his campaign rhetoric, or will that change once he takes office? No one really knows for sure, and therefore this period of uncertainty is likely to be with us for some time. Unfortunately as we all know, the one thing that markets dislike more than anything is uncertainty. Admittedly, we don’t have much to go on so far but my initial observations and thoughts are as follows:
- Blind Man’s Bluff: For the moment, Trump is behaving as though he’s in a position of strength. It’s a complete bluff, especially since US securities are already so highly valued against their fundamentals, and since corporate profits are well toppy at present, but maybe he’s going to get away with it? After all, Ronald Reagan did in the early 1980s!
- Fixed Interest is the one to watch: I think that the bond markets are likely to prove a better indicator of sentiment than the stock markets during the coming months, and believe that the flight to quality will keep US bonds okay despite the threatened Trump “haircut” for foreign bondholders.
- Tax : It’s worth remembering that Trump has not costed any of his proposals, and that almost the only thing he’s said about tax is that he wants to reduce all tax rates, and that he wants to abolish inheritance tax.
- Wages: Trump is contradictory. He’s promising higher wages, but he’s also saying he wants to reduce the cost of labour. He has it in big-time for unionised labour, which can cost some employers up to 50% above the standard rates, especially in the construction industry. But do his voters in the rust belts know about this? I doubt it.
- Sectors that might benefit? Infrastructure, where Trump has promised $1 trillion of investment against Hillary’s $500 billion (or thereabout).
- Sectors that will get thumped? Healthcare, and especially pharmaceuticals. Dismantling Obamacare will hit the drug companies especially hard.
- Dangers for the financial community? There is always a risk that a run on the stock or bond markets may expose a bank or a hedge fund that’s been taking too many chances. As Warren Buffett put it, “you only find out who is swimming naked when the tide goes out.” (I love that one.) The Asian panic and the Russian panic of the 1990s both turned up big hedge fund casualties – and one of them, IIRC, had a total exposure of more than $200 billion, which was equivalent to six months’ US current account deficit! And that one was rescued by the Federal Reserve, which bailed it out. This time, however, Trump hates the Federal Reserve – which he says is keeping interest rates down because it’s in thrall to Hillary.
- Scary. With all the uncertainty that the prospect of a Trump presidency brings to markets and to the global economy, I am sitting here with my fingers firmly crossed. Whether or not he lives up to his campaign messages or ends up softening them, the prospects are scary indeed.
For more detailed analysis as to future policy, read my thoughts here.
