“Make America Great Again.”
First we had Brexit, now we have President-Elect Donald J. Trump.
The reasons why Donald Trump will be inaugurated as the 45th President of the United States will be debated long and hard. Was it that people who hadn’t voted for years turned out to support him? Was it all down to the white working class? Or his divisive rhetoric during an often bitter presidential campaign?
Right now, we don’t know. What’s certain is that, like Brexit, Trump’s victory was a defeat for conventional politics; a statement that ‘ordinary Americans’ were tired of being taken for granted and wanted a candidate who appeared to understand their fears and worries. As one commentator put it, Trump may have been “the imperfect candidate” but he had the “the perfect message.”
Trump will be sworn in as President on Friday 20th January 2017. What can we expect from his administration – and how will this affect American trade, international relations and, potentially, world stock markets?
The immediate impact
Early on Wednesday morning, the FTSE 100 index of leading shares opened down 145 points (roughly 2%), whilst the dollar also fell on international markets. However, the FTSE quickly recovered to be down by just 0.5% at lunchtime on Wednesday. The Mexican peso declined sharply against the dollar as it became apparent that Trump would win, given his stated intention to introduce trade barriers against Mexican exports: again, though, both the dollar and the peso recovered some of the lost ground after their immediate falls.
Trump’s victory speech was conciliatory; his advisers have been quick to emphasise the strength and business experience of the team he will assemble around him. That hasn’t stopped some gloomy predictions, with HSBC claiming that Trump will steer the US into a recession ‘after a year or two.’ City Index, however, have suggested that Trump in office will be far more conventional and less maverick than Trump on the campaign trail.
What was Trump proposing?
During the campaign, Trump proposed cutting corporate tax rates from 39% to 15%. He said that he wants to reduce tax and simplify tax rates across the board and he’s pledged to create thousands of jobs by reducing regulation and repealing Obamacare. Let’s look at those proposals in more detail:
Currently there are seven tax brackets in the US: Trump proposes to cut this to three, with a top rate for those earning over $225,000 (around £180,000) of 33%. The middle band would be 25%, with those earning less than $75,000 paying only 12%. These represent significant reductions from the current rates, and corporate taxes would also come down. Trump has pledged to reduce corporate tax rates to 15% from a notional top rate of 39% although in practice, the effective tax rate for S&P 500 companies is 29%.
These plans should in theory encourage businesses and individuals to invest, with the boost to the economy from the increased economic activity compensating for the lower tax rates. But if this boost doesn’t materialise then President Trump will be forced to reduce federal spending, whereas his current plans allow only for an increase in Government spending.
All of Trump’s policy positions are designed to create jobs in America. At one point in the campaign, he threatened a 45% tariff on Chinese imports, before subsequently backtracking. What we do know is that the President-Elect wants to decrease regulation on energy production to create mining and energy-related jobs. He’s also said that he wants to repeal Obamacare, saving 2 million jobs over the next ten years – and we know he’ll pursue trade policies that are intended to lead to more manufacturing jobs in the US.
This was one of the biggest areas of difference between the two candidates. Initially, Hillary Clinton was pro-free trade, whist Trump was consistently protectionist. He has argued that existing trade deals have taken manufacturing jobs out of the US, and he has been critical of both the North American Free Trade Agreement and the newly-negotiated Trans-Pacific Partnership. Despite rowing back on the threatened tariff on Chinese imports, Trump has remained critical of that country: “When I am President, China will be on notice that America is back in the global leadership business and that their days of cheating and currency manipulation are over.”
During the campaign, Trump didn’t go into detail on his plans but did say that he would spend $500bn on infrastructure to boost the economy and provide growth. In his acceptance speech, he mentioned roads, schools, airports, hospitals and bridges: there appears to be plenty of scope for spending federal money.
Wall Street and Financial Regulation
Hillary Clinton had a large slate of financial regulation planned: Donald Trump has called for a “pause on all new regulation.” We do know though, that Trump has called for the repeal of the Dodd-Frank regulation which grew out of the financial crisis, saying that it prevents banks from lending to “average Americans and American businesses” and therefore works against job creation.
The Economists’ Views
We started off by comparing Tuesday’s result to Brexit. As with the possibility of Brexit, many economists take an unfavourable view of Trump’s plans, with Kevin Logan, chief US economist at HSBC, saying that Trump’s proposals would ultimately lower US exports and increase the cost of imports. “Tax cuts might give GDP a short term boost,” he wrote, “but [Trump] would likely put the economy in recession within a year or two,” as noted in our introduction. The Wharton School of Business has predicted that Trump’s immigration plans would cost the US 4 million jobs.
Conversely, Larry Kudlow, an economist and commentator for CNBC, has likened Trump’s plans to the tax cuts under Reagan and Kennedy, both of which lead to 5% growth in US GDP. Additionally, plenty of business leaders have weighed in on Trump’s side, saying that less regulation would lead to more business investment.
Never has the phrase, “may you live in interesting times” been more appropriate. Several observers are predicting that President Trump may be very different from Donald Trump the campaigner. He is, after all, a man who has written a book called The Art of the Deal and aides have been quick to assure the news outlets that he knows how to compromise. The rhetoric of the campaign trail may quickly give way to the realities of office.
However, even if President Trump is more open to collaboration and negotiation than Donald Trump the campaigner, we now have a Republican President, Senate and House of Representatives. That presumably means we won’t see the ‘gridlock’ that was such a feature of the Obama years, as a Democratic President tussled with a Republican Congress. We can likely expect to see more legislation from President Trump and a tough line taken in international negotiations: “peace through strength” as he has termed it.
What of stock markets? In the long term, much will depend on the team Trump assembles around him. By Wednesday lunchtime, Asian markets had fallen by 1.2% on average, with the FTSE down by 0.5%, so the markets seem to be adopting a ‘wait and see’ approach, after those initial falls. That patience may now be mirrored by the Federal Reserve, as they consider whether or not to raise US interest rates.
Politically, congratulations are trickling in from around the world, but many politicians – especially in Germany where elections are due next year – will be fearing a populist backlash. Marine le Pen, leader of France’s Front National, was one of the first leaders to send her congratulations.
We are now in uncharted waters and events will doubtless move quickly over the next few weeks and in the months leading up to January. We have a ‘leader of the free world’ elected on a pledge to shake up America and America’s relations with the rest of the world. Please be assured that however markets and reactions to the new President play out, we are confirdent that our client portfolios are well positioned to weather choppy waters ahead and we will be here to answer your questions and provide you with any assistance you require.