In at least a couple of rallies during the election campaign, Trump allowed himself to be carried away by the enthusiastic crowds who cheered him and, tired of enumerating his promises one by one, said that whatever his constituents wanted he would achieve.
This promise, a Trump tailored to everyone's needs, has been inspiring the markets for a few weeks now. Everyone makes a movie of what they'd like, from a big tax cut to a new tunnel under the river to get to the office faster, and they understandably get excited. The fairly positive macro data add more fuel to the fire. If we do well all in all now, it is reasoned, there is no limit to how well we can do when we have, in addition to tax and infrastructure cuts, deregulation, public spending reform, repatriation of capital held abroad by companies, better commercial treaties etc.
We know that faith moves mountains and the rekindling of dormant animal spirits can really increase the propensity to invest and consume. Trump, on the other hand, is doing better than previously thought and is surrounding himself with high-profile people. Furthermore, his plans for the economy have drawn heavily from those of the Republicans of the lower house, who will therefore be happy to work day and night to pass in record time the measures that have long been in the drawer and which so far have not even tried to pull off knowing that Obama would veto everything.
In short, the road appears really downhill until late spring. There will be some profit taking in equities around settlement day, January 20, which will also be the time when you read the earnings that the strong dollar is once again weighing on the earnings of some US exporters. However, the correction, if any, will be short and contained because the flow of news from Washington will remain positive. Trump and Ryan's idea is to make the first hundred days truly pyrotechnic.
Those who have so far been hesitant to get on the bandwagon of the global Trump rally can still find a seat. The reloading of wallets is far from complete. For months, after all, we have witnessed a flight from equities in which the only remaining buyers were listed companies with their buy-backs. When starting from such light positions, the reloading takes well over one or two months and the fact that the hunger for shares is still very strong is demonstrated by the positive, almost reckless reaction to the surprise correction to the rate profile in 2017, with three increases instead of two, by the Fed.
In January, the market reaction was quite different when Stanley Fischer, surprising everyone, hypothesized four hikes for 2016. The world seemed to falter, the economic cycle appeared close to its conclusion and the bull market consigned to history. It was thought at the time that 2016 would see the start of a global recession led by China and here we are now, at the end of the year, in a full state of grace.
The story of 2016 is yet another confirmation of how little visibility on the future is, always and in any case. Also for this reason, the theses of those who speak of a positive entire 2017 for the dollar and for the stock exchanges and heavily negative for bonds seem too emphatic. The maximum visibility we can afford reaches until spring. At some point, however, some of the current trends will have to stop or even reverse. A stronger dollar and weaker bonds may coexist with an equity rally for some time, but not forever.
At some point, on the other hand, the equity reloading of portfolios will be complete and the negative news, which today is met with a shrug of the shoulders, will start to really hurt. After the first hundred days in which Trump and Congress are going to love each other because they will deal with the part of the program they have in common, there will come a moment in which Trump will start to push to one side and Congress (particularly the Senate ) on the other. Without considering the French elections, equivalent to ten times Brexit if Le Pen were to emerge victorious.
In short, there will come a time when it will be good to sell shares and dollars and buy bonds, euros (if Fillon has won in France) and shares linked to interest rates. Perhaps for this reason, 2017 will ultimately be a difficult and frustrating year in which it will be easy to be caught off guard and make mistakes.
A first mistake will be to wait too long before entering the stock market. Those who have entered in time, however, will also have to be careful not to wait too long before exiting. As for bonds, central banks have practically completed the first phase of normalizing interest rate curves, which now have the right slope. However, we must not confuse the normalization of the curves, made possible by a global economy that no longer appears on the brink of deflation, with rising inflation, which has yet to be measured and demonstrated.
There is certainly a structural tendency towards a slow rise in inflation, due to full employment in America and to European and Japanese Qe, but we must not exaggerate in adding to this, already in prices, a Trump effect. Many of Trump's policies, especially deregulation, are actually disinflationary. As for infrastructure, no one has noticed the inflationary effects of the 830 billion spent on infrastructure under Obama or the multiple of that amount spent in the past twenty years by Japan. As for the dollar, its natural tendency, in a phase in which the Fed raises rates and the others leave them unchanged, is towards strengthening. Be careful, though.
There will be moments, as we have seen, in which the joint action of the dollar and rates will risk appearing to be the cause of a possible slowdown in American growth (every year there is always at least one disappointing quarter). In that case it will be Trump himself, with a tweet or a statement, who will quickly correct the dollar. European stock exchanges recovered a lot of ground but still remain attractive in a context of stable growth and a weak euro. The Japanese market, inversely correlated to the yen and favored in every possible way by the Abe government, also has potential for further upside.
As for emerging stock exchanges, the disappointing performance of the last period is not due to fundamentals, which remain positive, but to outflows from international managers. After all, it is not clear why the strong dollar should do so much good for Europe and Japan and so much harm for the emerging countries. It's actually good for everyone (with the exception of a few heavily dollar-indebted countries). Those who are hesitant to chase the stock markets of developed countries because they don't want to overpay for them will do well to consider a counter-current trip to emerging countries.
