The S&P 500 topped $20 trillion in market value this week.
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That is nuts, and it’s likely that Trump’s recent announcements of tax cuts are fueling the bullish sentiment on Wall Street, but will it last, and what effect will the current political climate have on the financial industry?
We like to believe that the prosperity of a nation is linked to who the president is, and what they do
President Obama’s tenure started on the back of a recession and he was lambasted by the media because he happened to be the president at the time.
Did Barack Obama have anything to do with the sub-prime mortgage bubble?
Was he blamed for not being able to pull America up from its self-created financial hole fast enough?
This isn’t a new phenomenon. Bill Clinton and Ronald Reagan are lauded as great presidents simply because they happened to be in office during great boom periods. It’s the nature of the beast. Get in while the getting’s good.
Learning from the past
Markets move in cycles. Markets move up, and then they go back down. These cycles occur over different timeframes; there’s a 4 year cycle, 8 year cycle, a 10 year and even a 40 and 60 year cycle. Interestingly, the 4 and 8 year cycle tends to line up with presidential terms.
It’s easy to see why. Investors are human, and human behavior shapes and guides markets. The first year of a President’s term tends to bring a strong performance in the equity markets. The second year sees a dip, before climbing back up for the third and fourth years.
If a president makes it a second term then his first year also tends to do well. The end of the second term tends to do badly though, maybe because investors face more uncertainty at the prospect of an election without an incumbent.
President Trump takes over as president as the financial markets continue their ascent out of the 2008 crash, and so far the markets have behaved as expected.
Since Trump’s election, the S&P 500 has increased by about 9%. This fits the profile, as investors are pricing in the reforms that incoming presidents tend to undertake. Trump is no different, and he’s promised to lower corporate taxes, deregulate the banks and increase spending – these are all expansionary policies for an economy and investors have been quick to react.
Trump ran on a pro-nationalism, anti-globalist agenda. One of the ways to keep your multi-national companies’ manufacturing practices in the U.S. is by offering corporate tax breaks. It’s already begun to have an impact as huge companies such as Toyota and Amazon have promised to create more jobs in the U.S.
It is likely that Trump will also enact laws that favor the expansion of, and deregulation of Wall Street. These policies, if put in place, will definitely fuel further bullish sentiment in the financial industry.
What about the craziness?
The president of the United States does not generally impact the daily ebbs and flows of the financial world.
Trump is not like any other president before him. He’s more prone to say anything, and everything, that comes into his head. It’s this unpredictability in word and deed that will have the biggest impact on Wall Street and the financial community.
For instance, Trump’s travel ban sparked unease on Wall Street and the VIX – an index that measures volatility, or unpredictability in price swings of the S&P 500 – shot up.
Donald Trump will likely continue to say crazy things and investors will react. We will likely see more unpredictability in the markets during Trump’s stay in the White House.
And it’s not just at home. Trump’s pronouncements tend to have repercussions that echo across the globe.
Remember all that build-a-wall nonsense? Since the Donald’s election, the Mexican peso has lost 11% versus the dollar as investors try to get ahead of each other. Meanwhile, companies are vary of investing in Mexico. Ford Motors had plans for a $1.6 billion plant in Mexico, but have since opted to nix that in favor of a facility in Michigan. Corporate CEOs have to act as if Trump will get everything he wants, and his policies are already having effect, even before they’re implemented.
It’s becoming increasingly clear that the markets are being driven by Trump’s promises. The run up in the S&P 500 is due to investors pricing in his policies, but at the same time they are ignoring the negative aspects of some of Trump’s more protectionist policies. Investors love Trump’s pragmatic business policies while conveniently blocking out the protectionist, bring-our-jobs-back rhetoric that could cause headaches with trade partners.
The final word
It remains to be seen what will happen.
It’s likely that the markets will quiet down for a bit as investors look to Trump to actually execute his policies. Carrying out these policies will push markets higher, but if the President falters then so will the markets.
Also expect greater volatility in the day to day, as Trump’s penchant for putting the affairs of the White House in public view will create unease and uncertainty for investors.
Finally, we should be aware that there’s only so much a president can do. You can decorate a house and make it look fantastic, but if the foundation is rotten then it’s not going to last long.
We’ve been lucky. The recovery following the Great Recession is still going strong but expansion periods typically last 47 months. The current one we are in has lasted over 90 months. Eventually, this period will come to end as it is one of the longest expansion periods since 1900. With that said, it doesn’t necessarily have to come to an end anytime soon.
Look closely at the underlying health of the economy and make the call yourself.