Blog Post

The Trump market rally conundrum

What’s at stake: Since Donald Trump’s election in November, the US stock market has been on an unabated rally. The Dow Jones Industrial Average powered through the 20,000 mark for the first time in history. POTUS has been quick in using this financial bonanza as prima facie evidence of his early accomplishments. However, several commentators question the link between Trump’s unorthodox economic policy pledges, the stock market rally, and future growth prospects.

By: Date: February 27, 2017 Topic: Finance & Financial Regulation

On Vox, Jim Tankersley wonders about why the stock market loves Donald Trump. He notes how the rally started off powered by banking stocks, which made sense in light of promises of deregulation. Goldman Sachs alone accounts for over 20% of the gains in the Dow Jones since the election. However, the rally has then progressively spread across industries (see figure below for the sector performance numbers for the S&P 500). By now, it is fuelled by a generalised spike in business confidence. This also comes on the back of very strong labour market figures bequeathed to the new POTUS by the Obama administration.

Source: BloombergView

blogsreview2302

Testifying before the House of Representatives Committee on Financial Services, the Federal Reserve Chair Janet Yellen explained how, in her view, the current stock market run is led by the fact that market participants are likely anticipating shifts in fiscal policy that will stimulate growth and possibly raise earnings. She noted how this is accompanied by a rise in long-term interest rates and strengthening of the US dollar.

In a note to investors, Erik Nielsen of Unicredit points out that the current stock market rally is mostly fuelled by the conviction that Trump will implement only the “good” part of his campaign promises (tax cuts, deregulation, infrastructure building), while refraining from pursuing the “bad” promises (trade wars, import tariffs, unravelling multilateral agreements). To him, this conviction is largely ungrounded.

Larry Summers is persuaded that markets are on an unmotivated sugar-high that will not last a year. He makes the point that it is a mistake to judge policy on immediate market reactions rather than changes in the fundamentals. In the end, the past president who enjoyed the best post-election pre-inauguration stock market performance was Herbert Hoover, just ahead of the 1929 Great Depression. In line with Kenneth Rogoff, he points out that authoritarian governments have historically brought bull markets, before leading countries to disaster.

According to Robert Schiller, the US is living through two simultaneous illusions: that Trump is a business genius and that stock markets are hitting never-ending new records. These claims, and the link between the two, are only in the President’s interest. Two days after Trump’s election, the Dow Jones hit a new record high – and has since set 16 more daily records, all heralded by the media. However, the Dow had already hit nine record highs before the election, when Hillary Clinton was projected to win. Moreover, if you look at it in real terms, the Dow is up only 19% since 2000, which is rather underwhelming in a 2% inflation target environment.

Paul Krugman concedes that, contrary to his early predictions of a financial market crash in the case of a Trump election, stock prices have indeed grown. However, the fluctuation is not that big by historical standards. Looking at the change in government bond yields, he argues that the market must be pricing in a stimulus package of roughly 1% of GDP. He therefore concludes that the hype about a “Trump effect” is much overdone.

Nouriel Roubini enriches this analysis by detailing how the fiscal stimulus envisaged by the President will benefit disproportionately large corporations, based on steep cuts in corporate and capital gains taxes. It is therefore natural that stock markets are heading north. However, he expects this financial honeymoon to end soon. In a close to full employment environment, a fiscal stimulus could fuel an already rising inflation to the point that the Fed would be forced to hike up interest rates faster than originally expected. This would compound the dollar appreciation that has already been observed since the President’s election.

Ultimately, as Larry Summers remarks, nearly half of the S&P 500 revenues are earned abroad, and these will be harmed by a strengthening of the currency and Trump’s protectionist agenda, which might easily turn into a trade war. He concludes that promises of lower taxes and deregulation can only boost financial markets in the short term.

A dissenting opinion comes from Kenneth Rogoff, who underlines how Trump’s unorthodox policies might easily push the US economy above a 4% growth clip in the short run. Ultimately, aside from his protectionist views, he is extremely pro-business. Moreover, the impact of a demand boost on inflation will depend crucially on whether productivity in the US has flattened for structural reasons, or because there are underutilised and unemployed resources. If the low business investment is at the origin of it, Trump’s policies might have a considerable effect on the economy in the short run. As such, he invites to beware of pundits who are certain of an upcoming economic catastrophe. At least for a while.

The New Yorker synthesises this review on a facetious note.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic More by this author

Blog Post

The inverted yield curve

Longer-term yields falling below shorter-term yields have historically preceded recessions. Last week, the US 10-year yield was 21 basis points below the 3-month yield, a feat last seen during the summer of 2007. Is the current yield curve a trustworthy barometer for future growth?

By: Inês Goncalves Raposo Topic: Global Economics & Governance Date: June 11, 2019
Read article More on this topic More by this author

Opinion

Too crowded bets on “7” for USDCNY could be dangerous

The Chinese yuan has been under pressure in recent days due to the slowing economy and, more importantly, the escalating trade war with the US. While the Peoples Bank of China has never said it will safeguard the dollar-yuan exchange rate against any particular level, many analysts have treated '7' as a magic number and heated debates have begun over whether the number is unbreakable.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: June 6, 2019
Read article More on this topic More by this author

Blog Post

The 'seven' ceiling: China's yuan in trade talks

Investors and the public have been looking at the renminbi with caution after the Trump administration threatened to increase duties on countries that intervene in the markets to devalue/undervalue their currency relative to the dollar. The fear is that China could weaponise its currency following the further increase in tariffs imposed by the United States in early May. What is the likelihood of this happening and what would be the consequences for the existing tensions with the United States, as well as for the global economy?

By: Inês Goncalves Raposo Topic: Global Economics & Governance Date: June 3, 2019
Read article More on this topic More by this author

Opinion

Expect a U-shape for China’s current account

As the US aims to reduce it's bilateral trade deficit, China's current-account surplus is back in the headlines. However, in reality China’s current-account surplus has significantly dropped since the 2007-08 global financial crisis. In this opinion piece, Alicia García-Herrero discusses whether we should expect a structural deficit or a renewed surplus for China's current-account.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: May 28, 2019
Read article More on this topic More by this author

Blog Post

The next ECB president

On May 28th, EU heads of state and government will start the nomination process for the next ECB president. Leaving names of possible candidates aside, this review tries to isolate the arguments about what qualifications the new president should have and what challenges he or she is likely to face.

By: Konstantinos Efstathiou Topic: European Macroeconomics & Governance Date: May 27, 2019
Read article More on this topic More by this author

Blog Post

The latest European growth-rate estimates

The quarterly growth rate of the euro area in Q1 2019 was 0.4% (1.5% annualized), considerably higher than the low growth rates of the previous two quarters. This blog reviews the reaction to the release of these numbers and the discussion they have triggered about the euro area’s economic challenges.

By: Konstantinos Efstathiou Topic: European Macroeconomics & Governance Date: May 20, 2019
Read article More on this topic

Opinion

Will China’s trade war with the US end like that of Japan in the 1980s?

The outcome of the US-China trade war is anticipated to be quite different from the experience of Japan in the 1980s and 1990s, due to China’s relatively lower dependence on the US and having learned from the Japanese experience.

By: Alicia García-Herrero and Kohei Iwahara Topic: Global Economics & Governance Date: May 13, 2019
Read article More by this author

Blog Post

Is an electric car a cleaner car?

An article published by the Ifo Institute in Germany compares the carbon footprint of a battery-electric car to that of a diesel car, and argues a higher share of electric cars will not contribute to reducing German carbon dioxide emissions. Respondents rejected the authors’ calculations as unrealistic and biased, and pointed to a series of studies that conclude the opposite. We summarise the article and responses to it.

By: Michael Baltensperger Topic: Energy & Climate, Innovation & Competition Policy Date: May 13, 2019
Read article More on this topic More by this author

Blog Post

All eyes on the Fed

Last week the US Federal Reserve left the federal funds rate unchanged and lowered the interest rate on excess reserves. We review economists’ recent views on the monetary policy conduct and priorities of the United States’ central bank system.

By: Inês Goncalves Raposo Topic: Global Economics & Governance Date: May 6, 2019
Read article More on this topic

Opinion

Life after the multilateral trading system

Considering a world absent a multilateral trading system is not to promote such an outcome, but to encourage all to prepare for the worst and instil greater clarity in the mind of policymakers as to what happens if compromise fails.

By: Uri Dadush and Guntram B. Wolff Topic: Global Economics & Governance Date: April 25, 2019
Read article More on this topic More by this author

Blog Post

Is this blog post legal (under new EU copyright law)?

How new EU rules on using snippets from news publishers and on copyright infringement liability might affect circulation of information, revenue distribution, market power and EU business competitiveness.

By: Catarina Midoes Topic: European Macroeconomics & Governance Date: April 8, 2019
Read article More by this author

Opinion

Europe and the new imperialism

For decades, Europe has served as a steward of the post-war liberal order, ensuring that economic rules are enforced and that national ambitions are subordinated to shared goals within multilateral bodies. But with the United States and China increasingly mixing economics with nationalist foreign-policy agendas, Europe will have to adapt.

By: Jean Pisani-Ferry Topic: Global Economics & Governance, Innovation & Competition Policy Date: April 3, 2019
Load more posts