Financial markets around the world have been remarkably active since the improbable election of Donald Trump as the next president of the United States.
- The S&P 500 has risen by 5.8%
- The dollar has risen by 5.6% against the euro
- The dollar has risen an amazing 13.5% against the yen
- The Eurostoxx 50 has gained 7.0%, meaning US$ investors have a loss of about 1.5% from holding large-cap Euroland shares
- The Nikkei 225 is up by 11.4%, meaning US$ investors have a loss of about 2% from investing in Japanese stocks.
These are all big moves.
To my mind, in the US the correct way to interpret them is this: Wall Street believes paralysis in Washington is at an end and that resulting fiscal stimulus will allow the Fed to raise interest rates from their current extraordinary lows. Put it another way, the focus of treatment for the economy will be away from life support and toward a return to health. The enhanced potential for future earnings growth is generating both upward stock movement and higher interest rates. The latter is causing the dollar to rise.
For the rest of the world, I think, a different, more derivative, dynamic is at work. If investors are looking to the US as the locomotive that will pull Japan and the EU out of their current malaise, I think that’s a secondary effect. I think the rise in those markets is being driven by the spur to their export-oriented industries given to them by the precipitous falls in their currencies.
(An aside: there’s a certain irony in having the professed (but looney-tunes, in my view) Trump agenda of bringing low-wage low-skill jobs back from developing economies having been so immediately, and deeply, undermined by post-election currency movements.)
What to make of all this?
I interpret what’s happening as the start of a very traditional stock market pattern. When an economic upturn is beginning, commodities-related industries react in an anticipatory way to expected future events and then move more or less sideways until there’s clear evidence in earnings that the anticipation is correct. Earnings gains create a second, earnings-based upward movement.
Put a slightly different way, the market moves from having a bad future priced in to a neutral position. It then reacts to good things as and when they begin to occur.
A third formulation: the post-election move is akin to the beginning of a business-cycle driven bull market. That’s a little strong, since I don’t think the typical 30% gains of a bull market are in store for us over the next couple of years.
But I do believe we should be thinking aggressively, not defensively.
What would change my mind, or at least cause me to rethink? …weakness in the US$, or some sign that the new administration has no intention of carrying out its agenda of breaking with business as usual in Washington.
More tomorrow.