It’s the long game that matters

Today’s market rebound was a short-term reaction that reveals nothing about the fundamental shifts that lie ahead.

An office worker is reflected on a window of the Australian Securities Exchange building on November 10, 2016 in Sydney, Australia. (Photo by Daniel Munoz/Getty Images)

The bounce-back in US stocks as markets adjusted to the reality of a Trump presidency was a rational short-term reaction. It’s the longer term implications for markets, economies and international relations once Trump actually takes office next year and starts to implement his radical suite of policies that will be of greater consequence.

There were two broad influences behind the big shift in sentiment that saw a major stockmarket fall signalled by the futures markets as a Trump victory became apparent turn into a solid rebound in the markets once physical trading got underway.

It helped that Trump’s victory speech was conciliatory in tone. “Crooked Hilary” suddenly became “Secretary Clinton, who had “worked very long and very hard over a long period of time” and who was owed “a major debt of gratitude for her service to her country.”

While he would always put America’s interests first, he would deal fairly with “everyone, all people and all other nations,” seeking common ground and partnerships rather than hostility or conflict.

After perhaps the ugliest presidential election campaign in history, the calmer and more statesmanlike rhetoric raised the possibility that President Trump might be somewhat different in office to the expectations created by candidate Trump.

Having raised expectations of radical change among his base, however, and with the Republicans firmly in control of both houses of Congress, Trump will have to deliver and the US market’ response represented its conclusion that his policies would be good for US stocks.

The most obvious beneficiaries are companies in a position to benefit from Trump’s plan to dramatically increase infrastructure spending, although bank and pharmaceutical stocks also gained. Loosening of bank regulation and the dissipation of the threat of price-caps for drugs boosted those sectors.

The prospect of a dramatic increase in government spending — of a huge injection of fiscal stimulus — is obviously positive for US equities in the near to medium term, although the longer term implications for inflation, deficits and debts for an already heavily-indebted economy will be debated once what were already quite vague promises to begin with become actual and fleshed-out policies.

Trump has also promised big corporate tax cuts, as well as tax cuts for the rich, which would benefit all US companies and boost their profits and share prices.

What’s good for equities isn’t necessarily good for bonds, where there was a sell-off in response to the prospect of much higher US Government debt-funded spending and higher levels of inflation. US interest rates will rise if the new administration follows through on its promises.

What’s good for America, in the near term at least, isn’t necessarily good for the rest of the world.

Trump’s trade policies and protectionist rhetoric would lead to a very different engagement by the US with the rest of the world and reflect the insular and anti-globalisation sentiment of the voter base that has won him office.

The Asia Pacific, so dependent on China, could be affected particularly badly if the US labels China a currency manipulator (which, as it allows increasingly more market influence over the value of the renminbi, it isn’t) and slaps massive tariffs on its goods.

Emerging market economies generally would be damaged if the tide of globalisation that has underpinned economic development in less-developed economies were to be reversed.

These implications for economies and markets outside the US, however, are longer term. In the near term, the outcome of the election generates uncertainty and ill-defined risks for the rest of the world. There is more obvious downside for the rest of the world than upside in Trump’s policies on trade and foreign relations.

The next-day response to the Trump victory has drawn the obvious comparisons to Brexit, where the immediate reaction in markets was shock and fear. The plunge in UK markets was (with the exception of the pound) quickly reversed.

The exact terms and impacts of Brexit, however, have yet to be negotiated and the withdrawal from the European Union may take several years to execute, if indeed it is executed.

Trump will officially become President of the US on January 20, 2017 and, with the Republicans triumphant, doesn’t have to negotiate with anyone other than his own party, where he’ll have a position of real strength.

There are some commonalities between Trump’s election and Brexit. They both reflected massive protest votes against the established political and social orders after eight years of monetary policies that have punished the middle and working classes but have benefited the wealthy. There was also a strong anti-immigrant undertone to both votes.

Trying to interpret the market’s reactions to a Trump presidency once the initial shock and response wears off through a Brexit lens, however, would be a pointless exercise.

Apart from the fact that UK voters appear to be experiencing voters’ remorse now that they are gaining a better understanding of the consequences of what they voted for, the UK isn’t of great consequence within the global economy and markets.

The US is of enormous consequence to the rest of the world.

Trump’s platform, if implemented, would represent a radical shift in America’s post-war economic, trade and foreign policies and therefore in the world’s economic and geopolitical settings.

What he says and does once he takes office could have — will have — quite profound and long-term impacts, not just on the US but on the rest of us, for better or for worse. Last night’s activity on Wall Street, or what the markets do in our region today, doesn’t tell us anything meaningful about what they might be.