After dropping in the first hours after it became clear Donald Trump had won the necessary votes in the electoral college, US equities are once again reaching historic highs alongside a concurrent rally in Treasury bond yields and the dollar. So, after all the talk about how disastrous Trump would be for markets what has changed traders’ minds?
Fiscal stimulus
Trump has made few hard and fast pledges post-election but it appears that he’s intent on pushing forward a massive infrastructure investment programme. Now, whether this will pass muster with fiscal conservatives in Congress is anyone’s guess but let’s assume for a moment it does. Who would this benefit?
Well, just about every company in the primary sector. Indeed, we’ve already seen sharp jumps in prices for commodities ranging from copper to iron and subsequent upward share price movement for those producers. Expect construction giants and infrastructure-focused REITs to also benefit from new building.
Tax reform
Trump has promised to trim the top corporate tax rate from 35% to 15%, which could well happen with Republicans in control of both chambers of Congress. Add in a mooted 10% tax holiday for repatriating American corporations’ $2.5trn of overseas cash and balance sheets across corporate America could look a lot healthier.
What would this mean for investors? Well, any extra cash on corporations’ balance sheets could, of course, be invested back into research & development, capex and the like. But, it’s more likely that most of that cash will be returned to shareholder via big dividends and share buyback programmes. This is good news for tech companies such as Apple, Microsoft and Oracle with billions of cash sitting overseas.
Deregulation
The perils of over-regulation (imagined or not) have long been a battle cry for Republicans intent on slashing red tape in Washington. Now is their chance with Trump pushing to roll back regulations concerning everything from climate change to financial services.
Who’s the winner here? Dirty energy producers such as coal miners could see what they perceive as overly-onerous regulations rolled back while Wall Street firms are chomping at the bit to see the end of post-Crisis reforms mandated by the Dodd-Frank act.
Protectionism
Trump has so far largely stayed quiet on his repeated promises to enact heavy tariffs on imported goods and renegotiate trade agreements in order to protect American manufacturers. Combined with the traditionally pro-free trade wing of the Republican party maintaining leadership positions in Congress, analysts are expecting Trump’s promised protectionism to amount to little more than harsh words.
Who benefits from this development? Well, free trade has been overwhelmingly positive for most American corporations so expect equities to rally on the news that they won’t face retaliatory tariffs overseas.
But, the most important question to ask is whether any of this information should change how you invest. And the answer to that is an unequivocal no. History has shown presidents have little effect on stock markets. And while traders may find profit in making short-term bets, that’s no way for investors like you and I to build long-term wealth.
