EDITORIAL COMMENT: Trump's Woes Have Hit Markets But Don't Ignore Fundamentals

Tom Burroughes

22 May 2017

Equities in the US and to some extent the rest of the world have been hit by fears that controversy around US Donald Trump’s alleged attempts to influence probes into possible Russian manipulation of the November elections.

Regardless of what one thinks of such allegations (this publication is not inclined to speculate), talk, however wild, that the president could be impeached, or be prevented from doing his job because of endless investigations, have spooked markets. The days of the “Trump trade”, as the rally since 9 November has been called, may be drawing to a close - for now.

But how much of what is going on has anything to do with political theatrics, and how much of what has happened is an overdue correction? As economists like to point out, the US equity market is now more than nine years’ old, and history tells us that such a period is long in the tooth. With possible further US interest rate hikes in the pipeline, the “normalisation” process could take a toll. Markets, as traders should know, usually price in expected or hoped-for changes; a key issue will be the ability of the Trump administration to deliver on promised cuts to America’s high corporate tax rates, and deliver on deregulation in areas such as banking. Policy stasis could take more shine off markets.

The general view of wealth managers appears to be that Trump’s problems were the catalyst for a pullback in markets that is arguably overdue. For example, this is the stance of Lim Say Boon, chief investment officer at week’s labour market data (claims at historic lows) and a strong Philly Fed survey reinforce our confidence that the underlying structural economy is robust and that as long as the S&P does not experience a much more severe down move, we see nothing to suggest that the Fed will deviate from their normalisation of rates. At the March meeting, the Federal Open Market Committee dots suggested five more hikes until the end of 2018 and we believe that this path will remain unchanged in June, with the FOMC hiking at this meeting and signalling a gradual path. This will take the Fed Funds rate back towards a neutral rate above 2 per cent in the year ahead, with the economy close to full employment and with inflation close to its target. In this context, we believe that the pricing at the front end of the US curve is more asymmetric than ever, with market prices discounting no more than two hikes between now and the end of next year,” Dowding wrote.

“As we look ahead, we continue to voice the view that Capitol Hill remains more important with respect to the US legislative agenda than the White House. Trump appears to be a bit of a circus - but even were he to exit the stage, the prospect of Pence would probably be viewed even more bullishly by business and financial markets. In the short term, we see the announcement of a Special Counsel to take control of the investigation into potential collusion with Russia is a constructive step. Robert Mueller says.

Perhaps what all these issues suggest is that for high net worth and ultra-high net worth individuals, now more than ever it is important to stand back from the political fray and think about what are the medium- and long-term drivers of return, while having the tactical nimbleness to move when required. A certain stoicism in the face of all this drama isn’t always common. Wealth managers can really prove their value by trying to instil a measure of calm.