Despite being consistently written off as having little or no chance of defeating his opponent, Hillary Clinton, Donald Trump won the recent US Presidential Election and will succeed Barack Obama in late January 2017 to become the 45th President of the United States. In this article, we take a look at what impact Trump’s presidency may have on financial markets going forward.
Market reaction so far
As the results of the vote started to flow in and it became progressively clearer that Trump would win enough states (and therefore delegates) to be victorious, equity markets were down both in Australia and in the US. This was because it wasn’t the outcome markets had expected and perhaps even desired.
However, Trump’s victory address struck a far more measured and considered note than what was present during his volatile and at times, highly controversial campaign. This saw equity markets in the US and around the world bounce back strongly in the following days with Australian equities having their biggest single day rise in over 5 years on the day following the election.
Since 9 November, markets around the world have continued to perform strongly. Although it is still early days, this positive market behaviour is similar to the response that followed the Brexit vote earlier this year and suggests that markets may not view Trump’s presidency as the disaster that many have predicted.
Why are markets reacting this way?
Trump campaigned on a largely protectionist ‘America first’ policy platform that will focus on tax cuts and significantly increased spending on infrastructure and defence. These policies, if approved, will provide fiscal stimulus to the US economy and is likely to boost US economic growth which would in turn be a positive for global growth. In addition, increased fiscal stimulus will relieve some of the pressure on monetary stimulus (i.e. record low official interest rates) and could provide the US Federal Reserve with the ability to increase official US interest rates faster.
In addition, Trump’s rhetoric surrounding a number of his most controversial policy proposals (such as building a wall on the Mexican border) has softened since winning the election suggesting that he may take a more pragmatic approach to implementing his policy platform.
However, part of Trump’s protectionist agenda focuses on increasing jobs and wages in US manufacturing. To achieve this, Trump intends to embark on an anti-globalisation agenda by retreating from free trade agreements and imposing additional tariffs on overseas imports, particularly on goods from China. If other countries were to follow suit and introduce similar protectionist policies, this could lead to a substantial increase in the costs of goods to consumers, lower global trade and in turn, lower global economic growth. Only time will tell how significant an impact these changes may have and how markets will react.
There is still much uncertainty over how Trump will go about implementing his policy agenda, however, we expect no significant change in the direction of markets with the ‘trump effect’ being slightly positive for markets in the short term.
