We’re living in a period where politics is dominating markets. Once upon a time, analysts paid more attention to economic data, but banks and trading desks are becoming more aware that the world is increasingly being held hostage by political dynamics. The Greek bail-out and the problems the Federal government in the US had with Congress, were, it appears, just the beginning of a series of political shocks.
While currency traders sold the GBP heavily this summer, after the Brexit vote, it seems as if equity investors are becoming progressively more bullish about the prospects for a Trump presidency. And where there is optimism in US markets, the bonhomie seems to spread to other bourses.
Part of the positive vibe comes from the fact that the Republicans now control Congress, heralding the prospect of the president being able to get legislation through both houses. Donald Trump is promising the nation a stimulus package that also includes the prospect of relaxed regulation and lower taxes. In conversations with hedge fund managers this week, there was a noticeable lack of pessimism about the Trump election victory. Wall Street, it seems, is looking forward to four years without the SEC breathing down its neck.
We saw all the major US share indices close at record highs yesterday: this includes the Russell 2000, which tracks the share prices of smaller US listed firms. Sectors like materials and processing, technology, and producer durables are all looking bullish, as investors are expecting companies in these areas, with little foreign currency exposure, to do well.
Bear in mind that the Dow is calculated using the price of the most expensive companies, and its gains are being driven by a relatively small number of firms, including Goldman Sachs, JP Morgan and Caterpillar. But overall, US investors were turning away from the big international tech stocks, and looking for beneficiaries of a Federal spending spree.
Outside the US, this drive to hit 21st century highs in equities has also affected other markets. In particular, the Nikkei was up 0.31%, and the ASX was up 1.16%. In the UK, mining, oil and gas companies did well.
But last time the markets were in this territory, we were less than two years away from the savageries of the dot com crash, when prices for many companies had been over-inflated by private capital and unwarranted optimism. By any level of conventional wisdom, markets are over-priced again. Hedge funds are not expecting to see another rampant bull market, as the growth prospects are simply not there. While the US has been recovering cautiously, this does not merit some of the valuations we are already seeing.
We are also not likely to see an export-led recovery in the US: as Trump starts to veer away from supporting multi-lateral trade treaties, American exporters will have to deal with international tariffs that reflect the Trump administration’s own protective practices. I fear that what Trump is selling to Wall Street is a heavy dose of snake oil.
What traders are more likely to see is volatility, followed, inevitably, by another major market correction. It remains difficult to see how the Federal government can slash taxes while embarking on a major course of infrastructure spending. The Federal Reserve has already veered away from raising rates because it has recognised the fragility of the economy. Is Trump promising another New Deal like that of the Roosevelt administration in the 1930s? And if so, where he is going to get the money from?
Also, if Trump repeals some of the legislation that has been keeping the major banks from trading actively in the market on their own books, again, we will see a return to more volatility and front running, with all the sudden price reversals that came with it. For short term traders and lovers of volatility, this will create far more opportunities than we have seen in the last four years. But don’t expect a major bull trend in US stocks.