Précis of Oliver’s Insights 2 February 2017 by Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital.
Since the US election of Donald Trump last November financial markets have shown some optimism. regarding Donald Trump’s pro-growth policies were not the only factor playing a role in this rally – global economic indicators have improved significantly in most regions – but it certainly played a role. With Trump now inaugurated as President we’re at the point where that optimism is being tested.
In his first few weeks in the oval office, he’s already made numerous major announcements. While these moves are basically consistent with his campaign policies, some have created considerable consternation in the US and globally.
What investors need to think about
Quite clearly Trump is a different kind of US President to the norm so it’s a good idea to be aware of the potential issues that may bring:
- He could make a major policy mistake.
- He could trigger a major global trade war which could harm global growth.
- He’s not making friends in the media so they’re likely to try and discredit him if they can eg conflicts with business interests etc.
- His fiscal stimulus proposals could create a budget blow out. Or it could overstimulate the US economy causing a far more aggressive Fed.
- Congress could undermine his policies
- Some policies could backfire eg pushing US companies to keep production in the US could lead to lower productivity.
And it’s also important to assess these issues in a broader context:
- New administrations often make mistakes initially but over time as the bureaucracy moves into line with the Trump administration, this will improve.
- He’s not a traditional Republican so he’ll follow his own course.
- Jobs and higher wages for his middle America support base is critical. Getting stuck in a trade war with China and Mexico that just pushes prices up at Walmart won’t go down well with his support base.
- He has a more direct approach to communication so we’ll need to get used to a lot more noise coming out of Washington, but much of it will be just noise.
- He’s a businessman who prides himself on his negotiating skills so even if he starts with a tough stance it may be designed to get a better deal for the US rather than being the final aim.
- He has a short time to get his legislative agenda through Congress. The President’s party normally loses control of it in the mid-term elections (as Obama did after his first two years) – so he doesn’t want to waste too much time.
Where that leaves us
On balance, even with the rough start it’s likely that the pragmatic growth-focussed Trump will ultimately dominate the populist Trump.
We have to allow that it will take a while for pro-growth policies to be legislated. For example, the President and Congress may not agree a tax reduction package until later this year; and fears of a trade war are likely to get worse before they get better as Trump embarks on a tough negotiating position. This should ultimately be supportive of US/global growth but there’ll be volatility (and noise) along the way. Despite that, overall sharemarkets look like they’ll trend higher over the next 6 to12 months.
How US shares react to new presidents
History shows there’s uncertainty around new presidents. US shares in the first February of new presidents have had an average decline of 4% since Hoover in 1929.