We are living in one of those special moments in time when politics counts for more than economics. Markets now pay more attention to what is coming out of the White House than the Federal Reserve. They may be proved wrong, as we suspect the Fed may be cooking up something unpalatable for the Trump administration. But in the meantime, it seems, analysts are glued to every public utterance of the Donald.
This was no different yesterday, when the new President addressed Congress. It was an important speech, because ultimately, Congress could be Trump’s ultimate undoing. He will have one eye on the mid-term elections next year, and if the Republicans are punished in those, he will likely face enormous opposition on the Hill.
The speech yesterday seems to have been greeted with cautious optimism. Some pundits are hoping to see a return to Reaganomics, and an aggressive, business-driven policy that works for the benefit of American employers and American corporations. Certainly, there was nothing of the rambling we saw in his press conference last month, when he lambasted journalists.
It could be that policy advisors, working behind the scenes, are beginning to exert control over Trump’s public statements. The pro-business, pro-growth stance was tempered somewhat by a lack of detail on tax reform, deregulation, and his promised infrastructure binge. These are key areas for investors, and will dampen enthusiasm if they are not delivered.
Nigel Green, CEO of deVere Group, the financial advisory and wealth management business, had this to say this morning:
“The markets were hoping for a laundry list of facts on tax reform, deregulation, and on stimulus. This didn’t happen and this will be a disappointment. Such cold, hard facts would have certainly maintained the post-election stock rally and expectations that the economy will get a further boost.”
Trump claims that his economic team is currently working on what he calls “historic tax reform.” The administration has also said that this new tax legislation is in the pipeline, and could see the light of day by August.
“Whilst some will, no doubt, bemoan the lack of specifics in Trump’s address, for many savvy investors it is precisely this lack of specifics that has been the cause of so much enthusiasm,” Green continues. “The markets might not have been given the detail they wanted, but investors should react positively to Trump’s address.”
IF Trump sticks to his guns, and IF Congress cooperates with him, then winners will include the banking sector, and probably Wall Street more generally, plus the mining and energy sectors if we see the repeal of some of the Obama-era environmental laws.
Trump’s lack of detail should also worry markets and savvy traders. Have we heard much of the debt issues that plagued the Federal government during the Obama era? Do we assume that these have magically gone away since Trump’s election? Do investors for a second believe that the Obama administration would have shied away from infrastructure spending if it could afford the ambitious program that Trump has scoped out? We wonder where the money will come from, particularly as many traditional investors in US assets are switching money out of the country, into foreign investments. We are seeing this from Asian investors, and in the Latin American market.
“He has avoided the key subjects such as the financing of the extra spending, the federal deficit, amendments to regulations and the banks,” says Ipek Ozkardeskaya, senior market analyst with LCG.
Ultimately, if the Trump administration comes unstuck, it is because of a lack of cohesive, tried and tested policy. It is one thing to make stump speeches that please the electorate, quite another to deliver something that actually works. Now the markets want to see a game plan, and the US economy is in dire need of one if Trump is going to deliver on his promises of employment. If they do not emerge, then he could be facing a very dissatisfied electorate, sooner rather than later.
The Armchair Trader says:
Right now we think the Dow is floating on air. The rise in the index has been massive since Trump’s election, but most pro investors we speak to feel it is overvalued. Long term foreign investors in the US are beginning to move assets elsewhere – risk is on the table, and there will be opportunities out there in some sectors, like energy, but we cannot see such a rise sustaining itself indefinitely. Confidence may evaporate if the Trump team cannot come up with anything concrete, and soon.
