President-elect Donald Trump’s victory symbolizes a broad-based desire for change. Last night, when Trump’s family visited the famed Club 21 in New York to dine, they were met with a standing ovation. Markets are having are very similar reaction to Trump’s election. Clearly, the President-elect has entered in a honeymoon stage and markets are taking him literally, for now.
President-elect Trump ran what is widely known as a populist campaign with big promises and few specifics. Therefore, the only thing we know as investors is that we do not know what happens next. As a result, markets have been thrown into a tail spin after the election, departing from fundamentals. Last week’s market reaction can at best be summarized as “guess work” of what President elect Trump is likely to do after he takes office and we can see direct correlation between specific statements Donald Trump made and immediate market reaction. What markets are not pricing in yet is the feasibility of such statements and/or what an actual economic policy could look like. Until that is clear, we expect markets to remain unpredictable and sensitive to any further statements from the President-elect.
Here are few statements from the future President and how markets reacted to these words:
Trump: “Mexico will pay for the wall. 100%.”
- Market reaction: The Mexican currency plunged 13% and suffered the largest drop in nearly 20 years. The President elect’s anti-emigration views as well as promises to dump the North American Free Trade Agreement (NAFTA) agreement also made the peso vulnerable.
- Additionally, the stocks of US automotive companies with large production plants in Mexico that import back into the United States experienced weakness. The stock of Ford Motors (NYSE: F) specifically has been a frequent target of Trump on the campaign trail and fell by 2.99% in the morning of Nov. 9.
Trump: “If I become president, oh, do they have problems.”, referring to Amazon.
- Market reaction: Technology is the biggest group in the S&P 500 and the one to consistently post earnings growth over the last 18 months. However, the sector has dropped every day since Trump’s victory reflecting a general hostile relationship between Trump and the Tech elite. Trump criticized Bezos, Amazon CEO, for using his Washington Post ownership to keep taxes low on Amazon and avoid antitrust allegations. Trump also famously called for a boycott of Apple. Consequently, Facebook, Amazon.com Inc., Netflix Inc. and Google parent Alphabet each fell more than 2.4% with no change in their fundamentals. The industry heavily backed Hillary Clinton during her campaign but now the tables have turned. The markets seam to pricing in a potential set of policies that the President-elect may enact against these companies again without much thought of regulatory or practical feasibility.
- Beyond what might be campaign rhetoric, there are also potential policy change reasons for the tech weakness. A possible increase of tariffs on imports, especially from China, would decrease the margins of companies like Apple. A constraint on immigration may impact the tech companies’ ability to recruit hard to find talent. Tech companies will not benefit in a direct way from an infrastructure boost, and are somewhat near the end of the expansion cycle, even with a possible cut in corporate tax.
Trump: “Dodd-Frank is a very negative force, which has developed a very bad name.” on his intention to deregulate Wall Street.
- Market reaction: Post the election, financial stocks are on the rise, despite the sign that a full repeal likely won’t take place. Banks climbed 2.3% Monday, extending their gains since Trump’s victory to 11%.
- In addition to regulatory reprieve, financials have been roaring back, with the prospect of rates rising due to a conceivable inflationist fiscal policy and a drastic scaling up of the national debt. Periods of increased volatility and a departure from a zero-rate world also boost trading and brokerage revenues. Particularly for US banks, more immune to the Brexit costs and in better shape than their European counterparts, there does not seem to be a bearish cloud in the horizon under a Trump presidency.
Trump: “We are going to save the coal industry.” “We will use our vast coal, shale gas, and other American energy sources in a clean and appropriate manner to benefit American families and workers.” on empowering the US energy sector.
- Market reaction: Energy stocks are another winner from the election rocketing higher on the fact that Trump has promised to help oil and gas companies by cutting regulation. Shares in major coal producers (OTCMKTS: BTUUQ, NASDAQ: WLB, NYSE: CLD) made double digit gains, as wind turbine makers for example and alternative energy stocks have been trounced.
- President-elect Trump has been indelicately skeptical about climate change. His campaign manager said of Trump “He believes that global warming is naturally occurring. There are shifts naturally occurring.” In addition, he has suggested the complete elimination of the EPA, completely abandoning the Paris treaty, and he has shown to be an active proponent of re-invigorating the traditional energy extraction jobs (coal, natural gas, oil) at the detriment of renewable energies.
- Interestingly though, this will just add to the bearish commodity trend with OPEC increasing its output, and will lead to over-supply in the medium to long term. We might in fact revisit oil in the $25, and in its path, bankruptcies of over-leveraged drilling companies.
Trump: “Cut business rate to 15%. Reduce individual rates to three brackets of 12, 25, and 33 percent., with a 0 rate for many.” “Create high-paying jobs to bring growth to our stagnant economy.” “Nobody can build better than I can. Nobody knows construction better.” On his ability and plans to re-ignite the US growth engine.
- Market reaction: U.S. inflation expectations climbed from 1.6% to 1.9% as investors bet Trump will boost government spending, restrict on trade, and cut taxes. That indicates that investors are now expecting a pick-up in inflation over the next decade.
- The yield curve has steepened dramatically as investors are selling bonds fast in anticipation of higher rates. Ten-year treasury yields have gone up from 1.8% before the vote to 2.2%, the highest level since the beginning of 2016. Fundamentals in addition to the future President’s rhetoric are also at play here. Right now, the unemployment rate has been around 5% and close to the “full employment” phase. Pushing job growth in an already tight labor market would push wage growth, and heat up the inflation.
Bill Ackman: On Nov. 10, billionaire Bill Ackman at a conference said “I think Fannie and Freddie are going to get resolved in the first 12 months of this new administration, and I’m looking forward to having my second meeting with Donald Trump and negotiating a deal.”
- Market reaction: The biggest winner post the election has been the battered stocks of FNMA/ FMCC which have soared by about 70%. While Trump did not speak directly about his potential housing reform he has surrounded himself with advisors that lean toward privatization and policy changes in favor of current investors. There are many complexities about the future of the two companies. Refer to our previous articles: “Will FNMA And FMCC Bring Extraordinary Returns To Investors This Summer?”
- However, it seems their investors are reacting with renewed hope for resolution based on Trump’s election win.
Trump “The final key to the way I promote is bravado. I play to people’s fantasies. People may not always think big themselves, but they can still get very excited by those who do,” “That’s why a little hyperbole never hurts. People want to believe that something is the biggest and the greatest and the most spectacular.” “I call it truthful hyperbole. It’s an innocent form of exaggeration — and a very effective form of promotion.” –“The Art of the Deal”
There will be a new style, a new approach and a new set of rules in Washington come January. It is hard to predict what tangible policies will emerge from the campaign rhetoric and the markets are still guessing. This is clearly an evolving situation where conflicting campaign promises can sometimes meet the hard pavement of pragmatism and reality, and where short term impulses should be weighted by the long-term projections of economic growth, inflation and debt levels. For now, market participants and the electorate and the author choose to give the President-elect the benefit of the doubt. Donald Trump can indeed surprise on the upside and we may enter a new Reagan-like era which Republicans have long dreamed of rebuilding.