Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 188

How Trump drives high business expectations

The surprise election of Donald Trump electrified financial markets and pushed the Dow above 20,000 for the first time. The prospect of the Republican Party controlling all three branches of the US government, combined with Donald Trump’s fiery pledges to cut corporate tax rates and embark on large-scale infrastructure spending programmes, has driven equity markets, the US dollar and US interest rates significantly higher. Financial markets around the world now anticipate substantial fiscal easing and a programme of deregulation under the new administration.

The segment of the US economy most buoyed by the election result is small business. This section of the economy was frustrated by the re-election of Barack Obama in 2012 and the resulting political stalemate that followed. In contrast, the election of Trump, with his narrative of deregulation, lower taxes and the repatriation of American jobs, has driven future expectations in this part of the economy to near euphoric levels.

Maximum business optimism

The chart below (next page) shows the US National Federation of Independent Business (NFIB) Small Business Optimism Index, for which data has been collected for since 1973. In December 2016, the month following Trump’s election, the index rose to 105.8, the highest reading since December 2004.

On a month-on-month basis, two of the 10 underlying components in this index accounted for 73% of total index gains: the outlook for business conditions and expectations for real sales growth.

Small business accounts for 49% of private-sector employment in the US and 46% of private sector output. It is a section of the economy that feels it has largely missed out on the current economic expansion. Aggressive monetary easing from the US Fed has pushed asset prices to record highs and interest rates to effectively zero (in real terms) for large borrowers. However, such actions have a limited impact on small businesses which hold few assets and which, eight years after the financial crisis, still struggle to secure financing.

NFIB Small Business Optimism Index

Source: NFIB Small Business Trends, December 2016

The bullish arguments underpinning the current market rally are thus based on the idea that the small business sector might now begin to participate in the economic recovery in earnest. Such participation could create a virtuous self-reinforcing cycle, with increasing aggregate demand putting to work latent economic capacity and lifting employment and wages, the effect of which would be to further increase aggregate demand. The idea is thus that the small business sector might now provide a new leg to the current economic expansion (already the third longest post-war US expansion on record) and the equity bull market that has ridden alongside it.

The audacity of hope

Sentiment-driven market rallies ultimately require the fundamentals to follow. The NFIB Small Business Optimism survey consists of 10 underlying index components, and it is telling that almost all of its gains have been driven by expectation components as opposed to hard metrics such as capital spending or employment gains. The NFIB report notes,

“Optimistic consumers and business owners are more likely to bet (spend and hire) on a future that seems to hold promise, but to maintain the enthusiasm, reality will play an important supporting role. The appearance of a new customer is much more powerful than the expectation of one”.

Since the election of Trump until the time of writing (26 January 2017), the S&P 500 has risen by 7.9% while the Russell 2000, an index that measures the small-cap segment of the US equity market, has risen by 16.0%. In tandem, US government 10-year yields have risen by 0.66%, while the US dollar index reached a 14-year high during December, although it has since retraced some of those gains. These are not insignificant moves and it is worth reflecting on what markets have now priced in, ahead of any actual action being forthcoming.

Whatever your views on Trump, he has put forward scant detail on what his economic policies will entail and which ones he will actually pursue (can you simultaneously build a wall, repeal Obamacare and cut corporate taxes?). It is fair to wonder therefore, how much of his agenda he will actually be able to implement.

In 2008, Barack Obama arrived into office also promising a revolution in Washington. Like Trump, he too led a party that controlled all three branches of government. Eight years on, few people today would say that Obama’s legacy has matched his incoming rhetoric of reform. Unlike Obama, Trump arrives into office with the lowest approval ratings ever for an incoming president.

Only Donald Trump (and hopefully Donald Trump) knows what a Trump presidency entails. Since his election, the market has broadly had to consider three key new policy agendas for the incoming administration: i) growth-supportive fiscal easing, ii) increased market protectionism and iii) new geo-political concerns.

To date the market has focused almost exclusively on the first of these. While fiscal easing certainly has the potential to stimulate growth, the established economic consensus is that protectionist policies shrink the aggregate economic pie. Meanwhile, it will be instructive to see how markets respond to, say, a military incident in the South China Sea.

For the market rally to sustain itself and move higher, reality will need to catch up to hope. Donald Trump is certainly a new kind of politician, but his promises to deliver a new kind of politics are not. Markets are probably correct to be anticipating a programme of (unfunded) fiscal stimulus. However, how much of this is already in asset-market pricing, and what is the impact to US growth and market sentiment from the enactment of some of the protectionist policies Trump has championed?

 

Miles Staude is Portfolio Manager at the Global Value Fund (ASX:GVF), which he manages from London. This article is the personal opinion of the writer and does not consider the circumstances of any individual.

1 Comments
Emma
February 02, 2017

Great graphical illustration there Miles. Great piece, thank you.

 

Leave a Comment:

banner

Most viewed in recent weeks

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

The huge cost of super tax concessions

The current net annual cost of superannuation tax subsidies is around $40 billion, growing to more than $110 billion by 2060. These subsidies have always been bad policy, representing a waste of taxpayers' money.

Latest Updates

Superannuation

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

Superannuation

Less than 1% of wealthy families will struggle to pay super tax: study

An ANU study has found that families with at least one super balance over $3 million have average wealth exceeding $19 million - suggesting most are well placed to absorb taxes on unrealised capital gains.   

Superannuation

Are SMSFs getting too much of a free ride?

SMSFs have managed to match, or even outperform, larger super funds despite adopting more conservative investment strategies. This looks at how they've done it - and the potential policy implications.  

Property

A developer's take on Australia's housing issues

Stockland’s development chief discusses supply constraints, government initiatives and the impact of Japanese-owned homebuilders on the industry. He also talks of green shoots in a troubled property market.

Economy

Lessons from 100 years of growing US debt

As the US debt ceiling looms, the usual warnings about a potential crash in bond and equity markets have started to appear. Investors can take confidence from history but should keep an eye on two main indicators.

Investment strategies

Investors might be paying too much for familiarity

US mega-cap tech stocks have dominated recent returns - but is familiarity distorting judgement? Like the Monty Hall problem, investing success often comes from switching when it feels hardest to do so.

Latest from Morningstar

A winning investment strategy sitting right under your nose

How does a strategy built around systematically buying-and-holding a basket of the market's biggest losers perform? It turns out pretty well, so why don't more investors do it?

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.