The Trump Effect
Since last Tuesday the President Elect has had a large impact on the US markets and other markets across the world.
Trump was elected the 45th president of the United States on Tuesday and in his victory speech at the New York Hilton promised to focus on economic growth when he is sworn in next January. “We have a great economic plan,” he said. “We will double our growth and have the strongest economy anywhere in the world.”
Trump was the 2016 election cycle’s most riveting figure. He initially focused his attention on immigration reform, calling for a wall to be built between Mexico and the United States and demanding the deportation of 11 million undocumented immigrants. He as wavered on that last point of late.
Mr Trump wants to slash tax on corporations, on high income individuals, low income individuals – in fact tax on just about every individual – while substantially increasing defence spending and, of course, reducing the deficit. This is just about possible to achieve if you believe that the stimulatory effects of lower taxes are very strong. This is the idea behind the so-called Laffer Curve. But President Reagan tried this and it didn’t work. The US ended up with huge twin deficits, budget and external.
Essentially, lower imports to the US and a stronger dollar from Federal Reserve rate hikes, combined with higher servicing costs for debt held in dollars, would curtail economic activity, especially in emerging markets, and drive global GDP lower than it would be otherwise.
Global interest rates and bond yields have followed this lead as the inevitable global economic slowdown is set to unfold. Expect central banks around the bulk of the world to implement easier monetary policy in the months ahead.
If the financial markets are correct, a Trump presidency will be bad for economic growth and bad for global trade.
The markets might be wrong. Sometimes they overreact to news events. As a result, there could be a market rebound when the dust of the election result settles and the policy reality confronts Trump, including dealing with the tensions within Congress, even though the Republicans will control both houses. Perhaps some of the policy proposals will not be delivered. Clearly it is too early to call.