As stock markets rose last year, President Trump enjoyed taking credit for the rise. With the S&P 500 index 9% below the January highs, he may be less pleased to take the credit for the drop. When Trump was inaugurated in January last year, we speculated that it would be Easter before we had clarity on which of his campaign promises he would follow through on. For the first few months his presidency was marked by things he tried to do, such as healthcare reform, which he was blocked on. We came to ask not what he wanted to do but what he could do. US equity markets rose, backed by a strong economy and on hopes of tax reform and increased spending. Trump proudly boasted about the strength of the US stock market and economy. If he can take credit for the stock market rise, is it becoming a case of 'buy the rumour but sell the fact'?
As we approach the second Easter of his term in office we have seen some real actions on tax, trade and fiscal spending which have had a mixed impact on markets. Investors welcomed the tax reform package, which finally passed in December, and the markets started the year strongly. The initial selloff from the highs was due more to fears that inflation, particularly in wages, would lead to higher interest rates rather than any specific presidential actions. Trump has long bemoaned the inequalities in the trade balance and by announcing tariffs, on steel and aluminium, he raised fears of a global trade war. In practice, these have been watered down by many exemptions for countries such as Canada, Mexico, the European Union and even South Korea. His subsequent announcement of tariffs aimed at China in particular, further raised tensions and hit markets. Finally, last week we saw him sign a budget deal, despite a threat to veto it at the last moment. This will see more spending on the military but fell short of his ambitions.
US equity markets rose last year supported by stronger economic numbers and better company earnings. As markets rise, they become more susceptible to periods of volatility as confidence waivers. Trump's trade policies may be seen as a negotiating stance but if it were to escalate into a global trade war then market fears could be justified. Trump's advisers and the President himself have talked about trade negotiations going well and I believe that he will get deals done which will allow him to herald a triumphant success and a trade war will be averted.
Was he justified in claiming credit for last year's stock market rise? Most things were in place already but there was an element of hope, so mostly not. Can he be blamed for the volatility this year? After such a long period of rising markets, a period of raised volatility is to be expected but at times, he has added fuel to the flames. As to where we go from here, our central view is that this quarter has seen a healthy correction. Volatility is likely to persist for some time but markets will move higher and this is unlikely to be the start of a sustained sell-off in equity markets.
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