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.

banner

Most viewed in recent weeks

Lessons when a fund manager of the year is down 25%

Every successful fund manager suffers periods of underperformance, and investors who jump from fund to fund chasing results are likely to do badly. Selecting a manager is a long-term decision but what else?

2022 election survey results: disillusion and disappointment

In almost 1,000 responses, our readers differ in voting intentions versus polling of the general population, but they have little doubt who will win and there is widespread disappointment with our politics.

Now you can earn 5% on bonds but stay with quality

Conservative investors who want the greater capital security of bonds can now lock in 5% but they should stay at the higher end of credit quality. Rises in rates and defaults mean it's not as easy as it looks.

30 ETFs in one ecosystem but is there a favourite?

In the last decade, ETFs have become a mainstay of many portfolios, with broad market access to most asset types, as well as a wide array of sectors and themes. Is there a favourite of a CEO who oversees 30 funds?

Betting markets as election predictors

Believe it or not, betting agencies are in the business of making money, not predicting outcomes. Is there anything we can learn from the current odds on the election results?

Meg on SMSFs – More on future-proofing your fund

Single-member SMSFs face challenges where the eventual beneficiaries (or support team in the event of incapacity) will be the member’s adult children. Even worse, what happens if one or more of the children live overseas?

Latest Updates

Superannuation

'It’s your money' schemes transfer super from young to old

With the Coalition losing the 2022 election, its policy to allow young people to access super goes back on the shelf. But lowering the downsizer age to 55 was supported by Labor. Check the merits of both policies.

Investment strategies

Rising recession risk and what it means for your portfolio

In this environment, safe-haven assets like Government bonds act as a diversifier given the uncorrelated nature to equities during periods of risk-off, while offering a yield above term deposit rates.

Investment strategies

‘Multidiscipline’: the secret of Bezos' and Buffett’s wild success

A key attribute of great investors is the ability to abstract away the specifics of a particular domain, leaving only the important underlying principles upon which great investments can be made.

Superannuation

Keep mandatory super pension drawdowns halved

The Transfer Balance Cap limits the tax concessions available in super pension funds, removing the need for large, compulsory drawdowns. Plus there are no requirements to draw money out of an accumulation fund.

Shares

Confession season is upon us: What’s next for equity markets

Companies tend to pre-position weak results ahead of 30 June, leading to earnings downgrades. The next two months will be critical for investors as a shift from ‘great expectations’ to ‘clear explanations’ gets underway.

Economy

Australia, the Lucky Country again?

We may have been extremely unlucky with the unforgiving weather plaguing the East Coast of Australia this year. However, on the economic front we are by many measures in a strong position relative to the rest of the world.

Exchange traded products

LIC discounts widening with the market sell-off

Discounts on LICs and LITs vary with market conditions, and many prominent managers have seen the value of their assets fall as well as discount widen. There may be opportunities for gains if discounts narrow.

Sponsors

Alliances

© 2022 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. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). 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.

Website Development by Master Publisher.