Turn and face the strange: Brian Tora on the crash that never was

It seems that 2016 will go down in the history books as the year of surprises, suggests Brian Tora, as he considers the reaction to the US election result – and how the response from global stockmarkets was not quite what had been predicted.

After the unexpected Brexit referendum result in the summer, we have what is arguably an even bigger upset with the election of Donald Trump as the next President of the United States of America. When the Brexit decision was first announced, shares dived, only to recover and even establish new highs. Similarly, the Trump victory in November saw a swift fall in indices, but this move was reversed in the first day of trading after the election.

Why no meltdown?

These moves are significant in the sense that popular wisdom failed to apply in both cases. Market commentators widely expected to see falls in the value of shares in the wake of a Leave decision and also a Trump win. Neither actually happened in the way that had been forecast. In the case of our Brexit referendum, it was the fall in the value of the pound – also expected – that made the main difference, given the international nature of our headline Footsie index. The swift recovery in market fortunes after the US election is a little harder to explain.

The Republican Party is considered the party of business, in much the same way as the Conservatives are here. Trump is a businessman, albeit with a record that has a few blemishes, so you might reasonably ask why markets were expected to prosper more under a Clinton victory? The answer lies partly in the unpredictability of the Republican candidate and in his more extreme pronouncements on the campaign trail.

Markets do not like uncertainty, which is why many thought the unexpected outcome of the US election could knock the stuffing out of shares. Moreover, Trump’s pronouncements on global trade appeared to presage a more isolationist America, with trade agreements being torn up and a global recession in prospect as the tide of globalisation is pushed back. But the earlier comments from the new President-elect suggested a more conciliatory tone, with pre-election promises being watered down and a more statesman-like approach being adopted.

Rhetoric or reality?

Time will tell, of course, but markets – which remain unsettled and volatile – look to be hoping that Trump will not prove to be the radical leader that many feared. Indeed, some are forecasting that business could boom under a Trump administration. Given that the Republicans now control both houses, as well as the executive, and could well take control of the Supreme Court before too long, it seems that any measures that the new President wishes to introduce are likely to be enacted.

Movers and shakers

Some of the stock market’s reaction was to be expected. Pharmaceutical stocks benefitted initially – unsurprising, given Trump’s comments on Obama Care, though he appears to be rowing back on this too. European defence stocks also received a boost as analysts considered that more of the cost of maintaining NATO and defending Europe from a more aggressive Russia would need to be borne locally. And the rise in the yields of US Treasuries – back over 2% at the time of writing – should also be expected, considering Trump’s criticism of the performance of the Federal Reserve Bank with its low interest rate policy.

As to the future, this has now become even more opaque than usual. The new President will doubtless be only too well aware that certain of his campaign promises cannot be ignored. It is likely therefore that building a stronger US economy and creating more jobs will likely feature strongly in his early policies. But restoring manufacturing jobs could prove a tougher fix. It is all very well claiming that China and Mexico are robbing US workers of their position, so requiring new trade barriers, but I dare say Apple might have a few issues with any aggressive trade war with China. It could well be that infrastructure moves more centre stage in America, as it has done here.

The waiting game

For investors and those advising them, a masterful policy of wait and see seems called for. American shares are not cheap, but the economy there is ticking along nicely, if in a subdued fashion. One of the comments made in the run-up to the election was that growth under a Democratic Party regime had proved unexciting. Perhaps Mr Trump plans some initiatives that will push growth higher, in which case we might see inflation rise, particularly if wages go up. The only thing we can take out of recent results with any degree of certainty is that the world of opinion polls will never be the same again.






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