As we approach the first anniversary of Donald Trump’s inauguration as president of the United States, Ian Heslop, manager of the Old Mutual US Equity Income Fund, Old Mutual Global Investors, explores the economic and market impact of year one of the presidency.
President Donald Trump may have been in power for only a year, but the amount of airtime he gets has made it feel like a lifetime. The one year anniversary of his inauguration on 20 January 2017 as the 45thpresident of the United States is an appropriate time to try to understand the initial impact of the new administration on the US economy and the reaction of equity markets.
Firstly, it should be recognised the US economy is humming along nicely, and the US stock market, which has been strong, reflects this. Trump’s signature tax policy is positive for future corporate profit growth, and his attack on regulation could in theory lead to further expansion. Generally these initiatives may be thought of as positive for equity markets. It should be noted, however, that these policies are very stimulative to an economy that is already fairly strong and that has low unemployment. If the effect of stimulating an already-strong economy eventually leads to the US Federal Reserve increasing the speed of the monetary tightening it has already embarked upon, that could bring about a distinctly chillier environment for equities.
Trump has definitely proved himself to be ‘not the usual politician’. He continues to say and do things that would have destroyed a normal political career. Any perceived slight is met by the full force of a presidential Twitter attack. Settled policy as espoused by other members of the administration can be contradicted by the president in seconds. Cliché it may be, but markets hate uncertainty, and this level of policy uncertainty may well affect sentiment going forward.
However, the link between macro and market is hugely difficult to forecast at the moment. Over the last couple of years we have witnessed events that, even if you had predicted them correctly, you might not have rightly forecast the market reaction: Trump’s surprise election victory on 8 November 2016 itself (which despite his being an unknown quantity was greeted by a rally) is a good example. Predicting an event is one thing, but how the market works is due to changes in sentiment after it actually happens. We continue to argue that predicting macro events in order to forecast market reaction is too hard. A better approach, we believe, is to measure how investor behaviour is changing and what this means for sentiment.