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Why the markets love Trump

And why they might change their minds.

Since Donald Trump was elected president of the US on November 8 last year, the S&P 500 has gained around 6.5%. Over the same period, the MSCI World Index is up over 3%.

This has not been the reaction that many analysts were expecting. In the run up to the election, some economists were predicting that a Trump victory could cost the S&P 500 between 7% and 10%.

This even seemed to be materialising when there was a sharp drop in the market after the election result became known. However, it was quickly reversed and has turned into a sustained rally. The market, it seems, very quickly changed its mind about what it meant to have Trump in the white house.

“There are really three pillars to Trump’s approach that the market has reacted well to,” explains Cai Rees, client investment strategist at global asset management firm SEI Investments. “Those are tax cuts, deregulation and government spending.”

Essentially, if these are implemented, they will all be good for company earnings and the broader US economy. And that means higher equity returns.

“Trump is talking about dropping corporate tax from 35% to 15%,” Rees says. “That is at the level of places like Taiwan and Ireland and other low-tax jurisdictions. And that 20% drop in tax would be a 20% increase in earnings right away.”

In terms of deregulation, Trump has talked about rolling back some of the restrictions on banks, which will free up their balance sheets and allow them to lend more. He also wants to cut back on the red tape around doing business, especially for start-ups and smaller companies.

He has also earmarked one trillion dollars to spend on infrastructure projects.

“Most economists will agree that the fastest way to grow your real economy is through infrastructure spending,” says Rees. “So this would provide a bump that could last a few years.”

That is the good story that the market has been reacting to, and on its own it would be a very good story. However, as Rees acknowledges, it also comes with “the rest of Trump”.

That is the bungling, the protectionist rhetoric, and the general lack of any coherent strategy. In other words, Trump also comes with an enormous amount of uncertainty. And that begs the question whether this won’t in time over-shadow the short-term benefits of his administration’s pro-business moves.

“You can’t not summarise the temporary travel ban as being very amateurish in appearance,” Rees says. “Most politicians wouldn’t be able to get away with being so amateurish. But the way he came into power was saying he doesn’t have the experience or skills of a career politician, so ultimately they will forgive him a few times for making these amateur mistakes in terms of implementation.”

News that Trump has drafted another executive order that will target the visa-work programmes widely used in Silicon Valley have also been met with alarm. The order will apparently force the likes of Apple, Microsoft and Amazon to prioritise hiring American workers.

“These companies rely heavily on high-skilled immigrants, and you are already seeing some of the main tech players coming out to say that they would fight this ban,” Rees says. “They are against immigration restrictions.”

These are the kinds of things that would introduce uncertainty into the US business environment. But even more concerning would be if Trump’s rhetoric on China led a trade war.

“These are the world’s two largest economies,” says Rees. “It’s very difficult for them to put up trade barriers against each other without that spilling over into the rest of the world.”

Ultimately, it’s still far too early to say whether the “Trump bump” in markets will last, but Rees remains cautiously optimistic.

“People are asking how far the rally can go and whether it shouldn’t be pared back by the uncertainty,” he notes, “but at the moment we don’t see any reason to think that the economy can’t grow well because of these policies on aggregate.

“But these are the questions that need to be answered,” Rees adds. “Is Trump’s style eventually going to outweigh any of the things to do with deregulation, tax relief and infrastructure? And in particular everyone is watching carefully what happens between the US and China.”

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He is going to bring industry BACK to America. The last few presidents gave it all away. I remember growing up and seeing made in America as a brand feature. Well he will do that again. BUT don’t mistake the coming market collapse on any policies he puts out. The current demise of the economic system has been a long time coming!

Times have changed. Made in America used to mean, designed, manufactured and assembled in America.

Indeed, those/some things are still designed in America, however, mostly not manufactured and certainly not assembled in America.
The employees in those countries that do the assembling for the USA-designed products cannot afford those finished products; simply because they are paid far less. There’s no regulated minimum wage in China!

If by “bring industry BACK to America” that also implies assembling of products then I am afraid that may well be a pipe dream unless the industry is willing to have less profits as a result of their paying high salaries to USA employees.

a substantially lower tax rate will negate a higher wage bill so still make the plan possible

Love him, hate him, crass, abrasive, whatever your view, Trump is anything but a good news politician. He is making things happen. He’s being decisive and he can roll with the punches. He will not win Mr. Congeniality awards and he may get one or two things wrong but that’s the nature of any turnaround. You have to tackle the elephants in the room head, limit dialogue, avoid procrastination and noise and get on with job of making America great again. SA is doing exactly the opposite. There is very little that our esteemed ruling party can hang their hat on which would make SA great.

Sorry but I’m not convinced that Trump is a good thing. He wants to bring industry back to America yet his clothing line was manufactured in Asia (I wonder where his daughter’s fashion goods are manufactured and if the Trump clothing line still exists?). There are just too many contradictions about this man and I seriously wonder about his level of emotional intelligence – which is so critical in a leader not running his own empire, and especially so with a ‘global leader’.

There are too many instances of juvenile behaviour to back this up – from his statements about women (bragging about grabbing their nether regions, walking into the change room at a beauty pageant because he could as he ‘owned it’ where many of the contestants would probably have only been in their late teens), getting into a slanging match with Meryl Streep, and many others, and ranting that she is an overrated actress, etc, etc (from a man who some claim can roll with the punches). This is kindergarten sand-box behaviour.

Trump’s whole outlook leaves me with the distinct impression that Trump has always got what Trump wants, regardless of the cost to others, and that is why he made billions in real estate development (along with massive tax dodges – but that’s another story). Surely running a nation such as America takes more than a cut-throat property mogul? We have already seen the amateurish side of him that is “the rest of Trump” after only a matter of days in office.

There is a huge danger that this kind of action will be repeated and other countries will react. We can all recall the time when SA made the mistake of taking a very insular approach with its lager mentality and the view that it did not need the rest of the world and we still suffer the consequences of that decades later. I hope I’m wrong and that it all works out as if it doesn’t the fallout won’t only impact on America. However, only time will tell.

The other thing is that we have seen how much has been written about economists (and here I’d like to add market analysts as well) and how very infrequently they get things right. Is this not yet another instance where the reality will end up being the opposite of what the popular call was?

PS: Rolling back restrictions on banks after the globally devastating subprime crisis of not too long ago might not be the wisest thing! Some really big market crashes have been caused by banks in the last few decades, but I suppose this will depend on what form and in what areas the deregulation happens. But, hey America voted for him so they will need to back him.

MSM twaddle regurgitated by SPAP again….

Well jock, I can only pray that it is indeed you and the other Trump fans that have the last laugh.

Tell you one thing – IF he is able to reduce corporate tax to 15% it’s going to be bonanza time on NYSE. Tonite Goldman Sachs up 4.2%(that’s 60%+ in 6 months). There of course is the question where he will find the money to fund this drop in tax!

And with a $19.3 trillion national debt, amongst other problems, one can only but wonder. Is this another instance of the lure of short-termism or is Trump proposing a truly sustainable change in economic policy?

If he were to levy a federal 10c levy on every gallon of gasoline, he would find almost all he needs.

I like it – competition is good for all

Is anyone else tired of hearing this anti-trump rhetoric? If Cairns could state legitimate facts that correlate to the title of this piece I would say fine, but this travel ban will have, if anything, a marginal impact on the economy. That being said, the facts stated in the first half of this article sure as hell will; lowering Tax and deregulating business, in the words of the man himself, ‘is going to be huge’.

Lets us not down play this, we’ve all been waiting for this for years, and hopefully this will force other governments to follow suit. The world is tired of living in the shadow of a super tax system professed to ensure the welfare of society when in actual fact it is just there to inflate the size and role of government and ensure that the crony capitalist system can continue.

You shouldn’t be give a shite how many bumbling cockups or political faux pas Trump happens to makes, as long as he does those two things… Deregulate business and lower taxes, expect good things. Its gonna be yuge…

End of comments.

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