Stock markets often take their cue from US President Donald Trump. Whether investors love him or loathe him, they cannot deny his significance. For weeks markets have been talking about trade wars, the possible outbreak of peace in Korea, and the summits the President has held with various world leaders. Ever since he changed some advisers and took a more aggressive stance on trade matters, markets have taken his tweets a bit more seriously.
We know Mr Trump himself is well aware of his impact on shares. He has told us so. We also know that for choice he would like the stock market higher, as proof that he is making America great again. He was pleased to report the strong performance of the stock market in his first year, and understands that trade rows can adversely affect sentiment.
First quarter earnings in the US are very positive, and there are some signs that the corporate tax cuts will result both in better wages and in repatriation of profits held overseas. Capital spending is on the up. The Administration’s relaxation of controls on oil and gas exploration and pipelines construction has given a big boost to US energy. All this is helpful to US share markets.
What investors now have to judge is how much pain will the President accept in the fields of international politics and trade, before deciding he can declare a “win” as he likes to do? The man whose name is on a book entitled The Art of the Deal will want to show he has done more smart deals on the world stage.
In the Art of the Deal President Trump says you should always protect against the downside, whilst thinking big and having fun. He argues that a deal maker needs to maximise his options. You can see elements of this approach in what he is now doing. He shocks by thinking big and making threats, but in practice tries to avoid damage to the US.
Military might not
It looks as if this President has less wish to engage in conflicts around the world with US military might than his predecessors. He was a critic of Hillary Clinton’s activist foreign policy using US force in various parts of the Middle East. President Trump prefers to carry a big stick but not to have to use it. In Korea he argued that the Obama Administration had been too feeble in tackling the emerging nuclear force of the North. In office, he escalated the rhetoric, and will now claim some of the credit for the present diplomatic breakthrough, with Kim Jong-un offering an end to nuclear testing and the closure of one facility as a prelude to talks. It appears he is being flexible over when and where he should meet the North Korean leader, and with his ally in South Korea now is keen to see a peace treaty at last concluded. Of course, things could go wrong, but so far so good as they edge towards some relaxations between the two Koreas. A nuclear free Korean peninsula may prove difficult for both sides, but more economic collaboration looks likely.
In the Middle East, President Trump was very critical of President Obama setting a red line over chemical weapons and then failing to take military action when Syria crossed the line. On the two recent occasions of something similar that have come to wider public attention, President Trump has used force to show he means what he says. He has, however, been very careful not to kill people whilst destroying installations, and even keener to avoid military exchanges with Russia who are well-entrenched in the country as Assad’s ally.
Jobs not war
We expect President Trump to try to keep the world guessing about when and whether he will use force, as he has no philosophy against it and would if necessary use it, but clearly he would rather not do so. His image of America great again is much more about promoting economic strength with more better-paid jobs than winning wars. He will want the US to have the best weapons and strong armed forces, but seems to prefer that they deter and impress without risky exposure to intense military conflict. Wars have a lot of downside, even for the strongest military power in the world.
His approach to trade is still evolving. He has not yet completed a renegotiation of any of the crucial trade relationships the US enjoys. I will look in more detail at how he is handling talks and potential talks with China, Nafta, and the EU in a later piece. All President Trump’s actions so far imply he does, in the end, want a deal – and he does not wish to do anything which impedes the faster growth he promised. This is indeed a very unusual President. For all his ability to upset and provoke some of those who do not vote for him with his words, and for all his irregular approach to the detailed business of government, he does seem to want to stick to the strategic economic vision he put to voters two years ago. Markets will continue to react negatively to some of his rhetoric, but they need to remember President Trump may be trying to limit the downside and may understand more about them than they realise.
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