Fear and loathing was the overriding sentiment of fund managers and analysts contemplating the market implications of an unlikely Donald Trump presidency. Instead we have seen hope and excitement as the reality sinks in. What changed?
It’s been quite the turnround. The overwhelming finance industry view before Tuesday’s election was that the stock market would tank if Mr Trump triumphed. Going by how equities quivered every time his poll numbers rose, Barclays analysts calculated that the S&P 500 could plummet as much as 13 per cent, while a Brookings paper by two economics professors estimated the slide might reach 15 per cent.
This wasn’t just the view of some overwrought strategists and academics. Bridgewater, the world’s biggest hedge fund group, reckoned US equities would tumble 10.4 per cent. Even as the initial carnage unfolded on Tuesday night, Aaron Sorkin, the Hollywood screenwriter, penned an open letter to his daughters and wife lamenting the result and a 700 point drop in Dow futures.
By the time he woke up the next morning, the Dow had rebounded, and within days the index hit a new record high. To his credit, professor Justin Wolfers, one of the Brookings paper authors, held his hands up after the election, and speculated whether the market simply changed its mind over the consequences. But why?
Unfortunately there is no simple answer, but here is a rough, possible explanation: Money managers were understandably unnerved, some even infuriated, by Mr Trump’s controversial candidacy, and allowed their horror over his many offensive statements and policies to override a cool-headed, cold-blooded assessment of the investment implications of his presidency.
As markets then reacted to every fluctuation in the polls, analysts extrapolated this jitteriness into doomsday predictions of what would happen if Mr Trump won.
But when confronted by the reality of his election win, stock investors swiftly switched back to their more natural state of optimism, focusing on the prospect of growth-boosting stimulus, tax cuts and tax reform, and the rollback of industry-inhibiting regulation. Simultaneously, bad policies were dismissed as campaign rhetoric. As the cliche goes, bond investors suffer nightmares, but equity investors have dreams.
Moreover, investors have since the financial crisis been conditioned by central banks to view every market wobble as an opportunity. This ”buy the dip” mentality played a big role again this week, even if the snap-back was so swift that there was no real dip to speak of.
The stock market recovery raises uncomfortable questions for fund managers who still find the reality of president-elect Trump abhorrent.
Some express their fear over the country’s direction in emotional terms. “It’s traumatic,” one says. “I’m hoping for the best but fearing the worst.” But they insist that they have to disentangle their political views from their investment views. And the consensus is currently that a Trump presidency is good for the stock market. Another fund manager compares it to investing in tobacco companies on the basis of their financial potential, even if he personally thinks they are “awful”.
But those nagging concerns will quickly manifest themselves in a fierce stock market rout should Mr Trump revert to his campaign persona. There’s giving the president-elect the benefit of the doubt; and then there’s credulously believing that he is Ronald Reagan reincarnate. At the moment markets are tilting too much towards the latter, blithely ignoring his more problematic policies.
Take financial stocks. Goldman Sachs and JPMorgan has been two of the Dow’s main engines in powering to a new high, buoyed by Mr Trump’s promise to dismantle Dodd-Frank, the main piece of post-crisis regulatory architecture. All banks have been boosted by the steepening yield curve.
But investors are conveniently ignoring that the Republicans have endorsed reinstating the Glass-Steagall Act that would dissect commercial and investment banking.
Technology stocks have sagged on concerns over an immigration crackdown that would drain their talent pool, but Mr Trump’s position on trade would be a major disruption for all US multinational companies. Ramped-up government spending may boost growth, but will likely fuel inflation and force the Federal Reserve to raise rates more aggressively than anticipated. That would strengthen the dollar and act as another headwind to corporate America.
At the moment, investors are betting that all the policies they like will become reality, while all the policies they dislike will remain campaign rhetoric. Maybe they are right. But it feels like a dangerous bet.