Investors Make Bullish Bet on Trump, and an Era of Tax Cuts and Spending

2016-11-22 13:32:17

 

Investors Make Bullish Bet on Trump, and an Era of Tax Cuts and Spending

Two weeks after Donald J. Trump swept to victory, investors from around the world are betting that his promises of tax cuts, fewer regulations and a spendthrift federal government can recharge the American economy.

This burst of exuberance sent the major markets to record highs on Monday, as investors continued to pull out of government bond funds whose yields are miserly. The momentum has shown few signs of slowing and has resulted in significant flows of money being poured into United States stocks.

The rush of money has also pushed up the value of the dollar against the currencies of developed nations, such as the euro, and those of developing nations like Brazil, Turkey and Mexico. A strong dollar that is underpinned by rising interest rates tends to spell trouble for emerging markets, as investors move money from these countries, creating havoc and making it harder for governments and corporations to pay off their dollar-denominated debts.

For that reason, many economists have warned that the downside to a Trump-inspired revival of the United States economy is a spate of calamities in emerging markets, as investors head quickly for the exit.

The recent euphoria stands in sharp contrast to Wall Street’s prediction, before the election, of market mayhem if Mr. Trump were to win. The view had been that his unpredictable ways would spook the financial world, not least his threat to rip up trade agreements with Mexico and fight China on its exports to the United States.

After a sharp but very brief slide in Asian trading on election night, when it became clear that Mr. Trump would win, markets rallied quickly as the Trump economic agenda was quickly assessed.

Two weeks is a short period of time in investment cycles, but the current wave of enthusiasm recalls the days after Ronald Reagan’s election in 1980, when investors around the world embraced his sunny view of American business potential.

“Once this thing starts, you will see people piling on and the prosperity will blow you away,” said Arthur Laffer, a lower-tax evangelist who advised Mr. Reagan on economic policy and is doing the same with Mr. Trump.

Mr. Laffer said little about the budget deficits and the surge in debt that resulted from Reagan-era policies. But his ebullience mirrors the mood in the markets as investors choose to set aside gloomier notions and bet instead on a jamboree in stocks that will — they hope — be supported by a Trump-style economic boom.

At the root of the postelection reappraisal, economists and investors contend, is the view that Republican control of the Senate and House, as well as the White House, will put an end to the divisive politics of the Obama years that prevented his administration from taking more direct steps to stimulate the economy.

Moreover, political analysts point to the fact that while Democrats have been criticizing the president-elect on many fronts, on the one subject investors have rallied around the most — infrastructure spending — there has been broad agreement with the president.

When it comes to market rallies, this one does not match the record set during President Obama’s first term, when the Standard & Poor’s 500-stock index rose 84.5 percent. If the markets were to duplicate that gain during a Trump administration, the S.&.P. 500 would have to be over 4,000 by late January 2021, according to Standard & Poor’s Global Market Intelligence.

The Obama stock market boom was fueled by an unprecedented period of central bank activism in the years after the 2008 financial crisis. Central bankers around the world flooded markets with easy liquidity that flowed into every type of financial asset.

With interest rates on the rise and inflation picking up, central banks are now in retreat. That means that the Trump administration will need fiscal policy — government spending and tax cuts — rather than relying on the Federal Reserve.

Still, on Monday, four major measures of the stock market reached record highs.

The benchmark S.&P. 500 closed up 16.3 points, or 0.75 percent, to 2,198.18. The S.&P. is now up about 3 percent since Mr. Trump’s victory.

The narrower Dow Jones industrial average closed up 0.47 percent on Monday, while the technology-heavy Nasdaq composite index ended up 0.89 percent. The Russell 2000, a benchmark of companies with smaller market values, ended the day up 0.50 percent.

It was the first time since Dec. 31, 1999, when stocks were still enjoying the dot-com boom, that the Dow, the S.&P. 500, the Nasdaq and the Russell 2000 reached highs on the same day, according to Ryan Detrick, a senior market strategist with LPL Financial. All but the Russell, however, had previously reached record highs together on the same day just last August.

Shares of energy companies led the stock market rally on Monday as oil prices climbed nearly 4 percent to a three-week high. Marathon Petroleum surged nearly 9 percent, Chesapeake Energy rose 7 percent, ConocoPhillips ended up 3.6 percent, and Exxon Mobil closed up 1.42 percent.

In recent years, a low oil price has signaled fears of global stagnation and deflation and the worry that hamstrung governments were not in a position to stimulate growth.

Now, in contrast to past decades when a high oil price would spark worries about inflation, its trend upward is being seen as a positive, perhaps heralding a move by governments around the world to spend more to lift their economies.

Like all stock market upticks, this one has been driven by sharp inflows of money. Not least from investors who had been seeking safety from uncertainty, political and otherwise, in government bonds. In the last 10 years, $1.5 trillion has moved into bond mutual funds, according to Merrill Lynch, while little has been able to stick in the stock market.

Now, as optimism spreads about Mr. Trump’s economic agenda, investors are pulling out of their bond funds and buying stocks that benefit when the economy turns around, like commercial banks.

“Investors are experiencing what I call FOMO — fear of missing out,” said Sam Stovall, chief investment strategist at the research firm CFRA. “They are playing catch-up.”

While he describes the recent run as impressive, he also points out that potential disappointments are lurking.

“This will be more of a challenge than people are now thinking,” Mr. Stovall said, referring to the high hopes for infrastructure spending. “The Republican Congress is still relatively conservative, so for every dollar of spending they will be asking for cutbacks, because our debt is already approaching 100 percent of G.D.P.”

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