Now we get to see to what degree the bite lives up to the bark. Investors have seemingly taken Trump at his word on his business-friendly tax plans, with the promise of big cuts to taxes on profits putting jet fuel into an already strong US equities rally.
The S&P 500 has climbed around 10% since the election, while the Dow Jones Industrials has put on 14%.
A big risk of course is that Trump is unable to deliver on his tax promises to the extent the market has been expecting, or has a change of mind. Signs of this could spook investors into a collective belief shares have had too much of a good thing and are due for a correction.
Another major potential flashpoint that could set off a market slide is the outbreak of a trade war between the US and China. There is a distinct possibility off a big fallout once Trump gets his hands on the levers of power, given some of the rhetoric during the campaign and transitional period. Fears of the effect of such a development on the two largest economies in the world could very conceivably prompt a flight from risk assets.
There are various other issues as well, such as the degree to which Trump’s infrastructure spending plan becomes a reality, and whether there is any meaningful reindustrialisation of the mid-western states.
“What will occupy front and centre stage in the first hundred days of Trump’s presidency is his focus on tax reforms,” said Richard Buxton, head of UK equities at Old Mutual Global Investors. “Slashing the corporate income tax rate should unleash significant cash piles currently stored overseas. US companies will, however, see both winners and losers depending on the nature of the reforms designed to favour exports over imports.”
“For Joe Public of Main Street the focus will be on how quickly any policies translate into more secure job prospects and some wage growth, fulfilling one of Trump’s key election pledges,” Buxton continued. “Two other key – and interlinked – issues will dominate markets thinking during the first hundred days. What will the new administration do in terms of protectionist policies and what role will the dollar play in this? Trump’s recent desire to talk the dollar down eased short-term fears that a stronger dollar could hurt corporate America. Will Trump deliberately attempt to weaken the US currency to put pressure on countries he deems to have artificially weak currencies and big trade surpluses?
Matt Ward, portfolio manager, US equities at Schroders argued there is still further to go on the current market climb.
“Although the US market has been very strong post-election, we are still constructive on 2017,” he said. This is largely attributable to stable US economic growth owing to the US consumer, which is two-thirds of the US economy. This is illustrated by continued robust employment growth, increasing and improved consumer balance sheets. In addition, the US industrial economy, a source of some consternation in 2016, seems to be inflecting upward. Accordingly, we see US GDP accelerating to the 2.5%-3.5% GDP level. It is amidst this backdrop we expect corporate revenue growth of 4%-6%, modest margin expansion and share repurchases of 1-2%, leaving us with 2017 earnings growth of 7% -9%.”