On balance U.S markets expect to perform well under Trump. e Dow Jones Industrial index passed through the 20,000 mark during US President Trump’s rst week in o ce, however it soon fell back from that high as Trump issued a temporary ban on citizens of seven Muslim-majority countries. Clearly it is di cult to forecast the impact of Trump’s policies on the market and there exists a wide disparity between expectations amongst stock market commentators.
On the one hand, you have those who see current price-to-earnings ratios as being the second highest since World War II and believe that we need to see very strong economic growth, followed by a substantial increase in corporate earnings, to keep the bull market alive. is side of the market believes that some of the impact of Trump’s policies have already been priced in. For instance, bank stocks have been rallying since his election on hopes for nancial sector deregulation. e industrial and materials sector has also done well in anticipation of a boost from infrastructure spending.
And those that fear technology stocks could be hit as a result of immigration tightening over speculation that it could limit technology companies’ access to overseas labour, which has a substantial presence in this sector. And retailers that look overseas for a lot of low- cost inventory could feel the impact of Trump’s trade policies, along with carmakers, if their imports are hit with taxes.
On the other hand, we have those who are more optimistic and whilst they acknowledge that stocks are not cheap if you look at a price-to-sales ratio basis. But if you lower the tax rates, resulting in companies have more money for their bottom line, then you have a dramatic shi in valuation which would ultimately mean stocks have more room to run over the next four years or so.
Such optimism is further supported by the belief that the pendulum of nancial regulation had swung too far in one direction under the Obama administration and that subsequent deregulation, including expected laxity on environmental regulations will ultimately prove bene cial. As this propels economic growth and as the Federal Reserve in the U.S starts raising interest rates then this results in a stronger dollar.
The argument follows that a strong dollar will lead wealthy overseas investors to buy into U.S stocks to bene t from comparatively higher U.S economic growth, whilst at the same time protecting themselves against a decline in their own domestic and regional currencies. Further supporting this view is that if individual tax rates also decline and this results in less interest in tax shielded municipal bonds currently on o er, wealthy investors would likely also redeploy money from these bonds towards stocks.
Further supporting a bullish Trump environment for stocks is the Republican controlled Congress, which should make it easier for the president to move forward with his policies, although we have noted that so far 2017 has shown that Trump is far from being able to railroad his policies through Congress. A significant concern and a major wildcard it the potential for trade protectionism, which could result in a trade war, pushing tariffs higher with some potential for a negative impact on the stock market.
Clearly there exists much support, and hope, in the U.S markets that Trump will propel the Dow towards the 30,000 mark over the next four years. For those not on the Trump bandwagon they fear a recession sometime in the next four years, which would obviously not be beneficial for the long-term stock market outlook. Based on the markets performance since Trump took office and the fact the current economic expansion shows no signs of slowing down,
Trump may well prove to live up to expectations that he will indeed be bene cial for U.S stocks, at least in the near term.