A Focus on Trump Trades
US Market Reaction – Insights
Markets completely got the US Presidential election result wrong, but ended up with good gains nonetheless. The view was that “Trump should not win, but if he does markets will tank.” As it turned out, Trump won but the market melt-down lasted only a few hours – with Trump’s less belligerent victory speech quickly soothing market fears, and enabling the Dow Jones to reach a new record high. The focus now is the extent to which “post-election Trump” will be more responsible in approach than the “pre-election Trump”.
In terms of Trump’s economic policies, markets are particularly excited about fiscal stimulus through tax cuts and increased spending on defence and infrastructure (including that wall!). This is helping construction and defence related stocks on Wall Street. Trumps’ other economic policy, reduced regulation, is also bullish for financial and health care stocks. The prospect of increased US fiscal stimulus is bullish for the USD and will add to upward pressure on bond yields. Apart from post-Trump sector rotation opportunities (as noted above), US equities overall remain challenged by still-high valuations and sluggish corporate earnings. Any possible boost to economic growth and earnings from fiscal stimulus needs to be counter-balanced with the likely added upward pressure on bond yields and inflation. Indeed, it should not be forgotten that the US economy already has a fairly tight labour market, as evident with a now clear upward trend in wages growth.
Australian Market Reaction – Insights
The “Trump trade” was also reflected in local markets, with the S&P/ASX 200 up nicely and bonds being dumped. Trump’s victory, along with China’s high PPI result, also provided another excuse for iron ore prices to rally further! Despite the recent changes and market performance nothing is likely to change the outlook for interest rates, with attention focused on the US and Trump.
All up, to the extent Trump’s victory is bullish for the US economy and the $US, it reduces at the margin the chances of a further RBA rate cut in 2017. Key market themes remain, sensitivity of local defensive yield plays (like listed property) in light of higher bonds yields, and a rotation toward financials for those still seeking yield. Resources remain bullish, but I remain skeptical of the sustainability of the recent surge in iron ore and coal prices and remain wary that “too much too soon” goods news has already been priced into the sector.
Article sourced from BetaShares economist David Bassanese published Dec 2016