Investors should give thanks for record highs – but prepare for Hard Trump
Thanksgiving, a national holiday of reconciliation, took on greater significance in the US this year as families tried to put political differences aside and find common ground in their love of turkey, stuffing and pumpkin pie.
President-elect Donald Trump attempted to mend the wounds of a divisive election campaign on the eve of Thanksgiving by offering a prayer to “heal divisions and move forward as one country”.
Trump’s tone may be good news for investors who have sought comfort in his softer post-election rhetoric, served up with a generous portion of fiscal stimulus, tax cuts and regulatory rollbacks. But after a week spent in America, I can’t help but wonder if the same elites who were blind-sided by Hillary Clinton’s defeat are getting ahead of themselves yet again by giving thanks to record-highs on Wall Street.
The reflation recipe is tried and tested: equities rise, bonds dip and the dollar rallies. But how long will it last? The data is on the bulls’ side: according to equities research group CFRA, back-to-back all-time highs for both the S&P 500 and S&P Small Cap 600 (as recorded last week) indicate the “Trump trade” could roll into a Santa Clause rally.
Since 1979, the S&P 500 gained an average 1.7 per cent three months after such a milestone and 4.1 per cent six months later. However, in the year that gave rise to Leicester City’s Premier League Championship, Brexit and Trump, it’s safe to say that historical data has gone the way of Great Grandma’s green bean casserole. And if the mood on Main Street is anything to go by, Wall Street might be discounting the odds of a “Hard” Trump moving in to the White House next year.
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“It’s scary, it feels like September 11th all over again,” one woman said in Santa Monica when asked about the local reaction to the election. A few miles down the road, garbage cans parked outside a row of Malibu bungalows featured the graffiti message: “Dump Trump.” But this isn’t an ordinary battle brewing between the coastal “Haves” and Middle America’s “Have Nots.”
A drive through Nashville’s privileged Belle Meade neighborhood caught my eye, with at least two giant Trump-Pence flags waving outside multi-million dollar mansions. This, in a city with the highest per-capita income in Tennessee, sitting in a municipal hub that voted overwhelmingly for Clinton, within a state that went Trump.
Put simply: the dividing lines that have been drawn over Trump’s victory are messy, and therefore difficult to mend. And Americans on the street appear less willing to buy into Trump’s new tone than investors do.
Read more: Elites would be foolish to dismiss Brexit and Trump as triumphs of populism
Part of the problem is that we still don’t know which Trump we’re going to get: Hard or Soft. With nearly seven weeks to go until Inauguration Day, the new cabinet offers the best glimpse at the future policy direction.
The most important position to fill will be secretary of state, due to the stark difference between the candidates under consideration. The appointment of outspoken Trump critic, Mitt Romney, would be a win for those in the Soft camp. The former presidential candidate, who famously called Trump a fraud, would provide a contrarian’s voice to keep some of the President-elect’s more extreme views, and the Trump-Putin “bromance”, in check.
On the other hand, former New York mayor Rudy Giuliani will send a signal that Trump is eager to surround himself with campaign loyalists who will toe the line in the Oval Office. Giuliani also carries some of the same baggage as his potential boss when it comes to questions over conflicts of interest surrounding his consulting firm.
If the “yes-man” prevails over qualifications in the secretary of state pick, then we should all be bracing for Hard Trump headwinds through year end.