It’s worthwhile to take a measured second look at what has been an absolutely wild week for the markets. Between the lows of Tuesday night in the overnight futures market, and the closing trade on Wednesday, we witnessed the Dow Jones Industrial Average in a range of 1000 points. What started was an initial selloff with Dow futures downs about 800 points to then rally and finish the day within double digit points of its all-time high. With that kind of market volatility, one would expect that catalyst to have been a definitive act from the US Federal Reserve indicating or making a change in interest rate policy, or federal stimulus unveiled by the US Federal government, but instead just an acceptance speech from the President-Elect, Donald Trump with hints to infrastructure spending and the more positive campaign promises that has investors reacting quickly and with their wallets to his pronouncements.
This will be the guessing game between now and the inauguration, and no doubt will contribute to more market volatility, but a modicum of rationality might be needed away from all this excitement to question how much change we may actually see, and what implications it has for the markets.
The Republican Party will have control of all three levels of government in the US, but how quickly they will act and give President-Elect Trump a mandate is at this point up in the air. Certainly the idea of corporate tax reform, a tax holiday for repatriating overseas earnings, and a dose of infrastructure spending are all positive to economic growth. On the other hand, it’s hard to quickly forget the uncertainty created by the protectionist rhetoric discussed over the course of the campaign, whether it was NAFTA and trade with Mexico, or slapping tariffs on Chinese goods in attempt to deflate the United States trade deficit with China. As Nouriel Roubini highlights in a recent post, tough talk on China carries the populist appeal, but is quickly realized once in office that it’s a zero sum game.
Similarly, with NAFTA, it does not seem like Trump would enter into scenario where he may cut off his nose to spite his face. As was a great pain for enlightened watchers throughout the campaign, the way in which the North America Free Trade Agreement was discussed illustrated how little understanding there was of the pact. As we’ve learnt, the threat of Trump pulling out of NAFTA could very much be possible by providing 6-month notification to Congress, but the ramifications of that makes it far less probable. An article in this Thursday’s Wall Street Journal debunks the “made in America,” idea of US automobiles and how the assembly is as much a story of parts travelling back and forth cross-border in the process. This is the essence in his team trying shift the conversation from being against free trade to promoting fairer trade.
Finally, we have to question whether it seems rational for the markets to be as overzealous as they are. A lot of the rally last week is certainly attributable to financials and anticipation that interest rates will be moving higher in December, and potentially soon after even more so with the inflationary policies proposed by Trump. Furthermore, it was further buoyed by the idea that the lax regulatory wing of the Republican Party would look to repeal Dodd-Frank and other measures that have tightened the grip on Wall Street. Our take is that if this were a government that were to accomplish anything, it will be in accordance with the slow moving pace of Washington, and very much in accordance with the marginally right of center but a divisive congress, and a filibuster prone senate.
As has been our view leading up to the election, the rhetoric created an opportunity for a lot of ‘noise,’ but whoever was to be elected does not change the dynamics of the global economy. As so many try to explain the phenomenon of Trump, former Pimco CEO Mohammed El-Erian explains it most prophetically by stating that low growth economic environments create civil unrest and prompt political change. The surprise outcome of the US shock should not surprise us any more than elections in Greece, Egypt, and Britain, including Brexit, and the list goes on. Trump will be a distraction, and justifiably an upsetting one for a number of people, but the current environment of a struggling debt burdened global economy has not changed, and for certain the alternative to President-elect Trump; albeit more tolerable to some, obviously wasn’t the answer.