Ray Dalio: unleashing ‘animal spirits’ will be key for Trump

The “animal spirits” that Donald Trump’s incoming US administration may unleash would have more far-reaching consequences on the economy and financial markets than any specific stimulus package he delivers, according to Bridgewater’s Ray Dalio.

Mr Dalio, the founder of the world’s largest hedge fund group, wrote that “if this administration can spark a virtuous cycle in which people can make money, the move out of cash (that pays them virtually nothing) to risk-on investments could be huge.”

The incoming administration “admires strong, can-do, profit makers,” Mr Dalio wrote in a LinkedIn blog post this week, as he compared the shift to Mr Trump from President Barack Obama to that from Jimmy Carter to Ronald Reagan.

Mr Trump’s surprise defeat of Hillary Clinton in last month’s election has turbocharged a shift away from sovereign bonds and into equities on hopes US growth will accelerate and, for debt investors, fears higher inflation will follow.

That sentiment has already been on display on Wall Street since the election: US stocks have added $1.37tn in market value since November 8, representing a 6 per cent rise, according to the S&P US broad market index.

The Dow Jones Industrial Average, one of America’s oldest equity benchmarks, climbed on Tuesday by 0.5 per cent to a new all-time high of 19,987.6 — leaving it within striking distance of 20,000. The broader S&P 500 rose 0.3 per cent to 2,269.8, just below its record peak, while the tech-heavy Nasdaq Composite advanced by 0.6 per cent to a fresh record of 5,489.5.

Financials, a sector that benefits from higher interest rates, strong economic growth, and less regulation has performed best since the election, with the S&P 500 sector of large-cap companies in the industry having rallied by nearly 20 per cent.

By contrast, consumer staples and utilities, two parts of the equity markett generally sought after during tougher economic times because of their consistent dividend yields and less economically-sensitive businesses, have performed the worst, falling 1.2 per cent and 0.6 per cent, respectively.

In fixed income, Treasury yields have soared to multiyear highs as investors have ditched the haven assets that were in demand in the first half of the year. The 10-year note yield last week crossed the 2.6 per cent mark for the first time since 2014, and hovered close to that level on Tuesday.

Mr Dalio cautioned that much will depend on the temperament of Mr Trump, whose tough talk can at times morph into inflammatory rhetoric. The property developer’s interactions with his top advisers, many of whom are themselves prominent business executives, will be key.

“The question is whether this administration will be a) aggressive and thoughtful or b) aggressive and reckless,” said Mr Dalio. “We are pretty sure that it won’t take long to find out.”

Mr Trump’s inauguration will be on January 20.