Why do markets merely shrug when the new U.S. president fails prominently with his first major bill in Congress? Why doesn’t Trump’s "art of no deal" end the so-called "Trump rally"?
Maybe because it isn’t a Trump rally after all but rather a market upswing based on the hope of a sustainable rise in both inflation and growth. This hope is probably what has been driving the bond, currency and stock markets on every continent since around mid-2016. So far, this hope has remained largely untarnished, especially in light of the economic data. Sentiment indicators look particularly good at the moment. Companies have started the current year full of optimism and analysts have raised their earnings estimates.
But what does optimism have to do with Trump? Well, for one, it’s hard to deny the positive boost to the markets provided by the U.S. elections. However, we believe this boost was mainly fueled by the relief investors felt knowing that the White House and Congress were again in the same, and above all, Republican hands. Added to this was the perception that Trump is a president who is not afraid to take action. Since the beginning of December, however, the S&P 500 Index has been merely keeping pace with global stock markets, while the more domestically oriented Russell 2000 Index has underperformed. This may show that the president has not actually created any new optimism since taking office. The indicator that probably best reflects the market’s view of Trump’s political assertiveness is the Mexican peso to U.S. dollar exchange rate. After the elections, the Mexican peso fell as much as 20 percent versus the U.S. dollar only to make almost a complete recovery by the end of March.
The positive interpretation chosen by today’s more relaxed peso buyers suggests that they believe that Trump’s protectionist plans will fail in a similar manner to his health-care-reform policy and travel-ban decrees. The negative interpretation would be to call into question the speedy implementation of tax reforms. This may cause some disappointment for U.S. investors as would a likely postponement of infrastructure projects. But global markets are less likely to be affected. The economic tailwinds are too strong. Besides, many international investors may not have been expecting much from Trump in the first place, so they might not be too disappointed.
In our opinion, not expecting too much, so as not to be disappointed, would again be the best approach for investors this year. Although valuations are stretched overall, we are still not seeing any signs of overheating or sharper hikes in interest rates. There also doesn’t appear to be any risk of a recession. Both of these factors should protect us from bear markets, even though we cannot rule out a setback before the summer.
Stefan Kreuzkamp, Chief Investment Officer