It’s hard to believe it has only been weeks since Trump was inaugurated as President of the United States. Since January 20th, we’ve had contentious executive orders, widespread protests, raucous Cabinet confirmations, Twitter controversies, and reports of spats with foreign governments. Every day seems to bring more source material for financial pundits, political commentators, and late night talk show hosts.
Amidst all of this commotion, financial markets have actually started the year strong. The S&P up about 4.5% YTD. Small caps up about 2%, international markets up about 4.5%, and emerging markets up about 10%. Fixed income markets are roughly flat so far this year, as rates have ticked marginally higher.
What accounts for the difference between the “chaos reigns” narrative in the media, and the relatively calm march higher in financial markets? Are markets blissfully ignorant of the potential risks in the Trump Administration, or is the media overstating the impact of Trump’s actions and the highly impassioned debates they’ve triggered?
We think that the market is largely looking at a Trump Presidency as representing two sets of possible policies, one of which is broadly favorable to markets and the economy, and another which is not. The favorable policies include the potential for corporate tax reform, a tax repatriation holiday, reduced regulatory burdens, and an infrastructure spending bill. On the other hand, markets are also weighing Trump’s protectionist bent and the unpredictability with which he conducts foreign policy. Markets have been mildly oscillating between these two views on any given day, but the overarching sentiment at this time is one of cautious optimism that the stimulative measures and improving macroeconomic backdrop will ultimately offset any negative policy developments.
One critical point to understand is that financial markets and the global economy are generally far more resilient than we tend to give them credit for. Over the past century, we’ve experienced world wars, recessions, depressions, financial crises, and unbelievable Super Bowl upsets. Although there’s been a lot of volatility and reasons to panic, financial markets are now closing near all-time highs. It’s simply hard to beat back the collective optimism and ethic that compels people to work hard, innovate, collaborate, and make the world a more prosperous and interconnected place.