U S stocks avoid carnage

So here we are. Donald J. Trump is President of the United States. What seemed like the least palatable scenario for financial markets during the most intense phase of campaigning last year—judging by their clear signals of aversion—has actually transpired.

Certainly, markets have not imploded in line with those initial forebodings. Quite the opposite. Early on, animal spirits took over, welcoming Trump’s vision of growth, big-ticket fiscal projects, tax cuts, and even in some quarters, the patriotic broad brush strokes in the president’s campaign theme, despite it blurring into ‘protectionism’. The conventional market wisdom says the word is anathema. Reality looks more pragmatic.

Still, just when many thought they’d begun to understand the new narrative, doubts that sceptics held ever since Trump won the presidency seemed to gain wider currency for investors. The Dow Jones Industrial Average signally failed to attain the symbolic milestone of 20,000. The dollar, which strengthened 17% against the yen after a sharp dip on 9th November, topped out in the middle of December. The greenback has trended lower against Japan’s currency since by about 4 percentage points.

It’s a similar picture against almost all other major currencies, and for all the benchmark indices. Some of this pull back is down to routine market effects, namely profit taking. Clearly though, some of the cool off looks like sentiment coming down to earth.

That said, the benchmark S&P 500 saw its highs of inauguration day around about the main event itself. The market did not take the opportunity to give a clear signal of disdain by selling off. Stocks did ease a little, but cannot be read as showing any particular reaction either way. The Dow strayed some 50 points from its peak. For the moment, we’re inclined to take these gyrations as reflective of what they look like: some uncertainty fuelling some volatility.

In sum, Friday’s session offered no verdict on the ‘Trump-trade’. Like the amorphous policies which are supposed to underlie this part-hypothetical-part-actual reflation-based market trend, it’s very much a work in progress.

In fact, all eight of the S&P 500’s major indices were higher on Friday, pointing, at least at a relatively ‘meta’ level, to no additional negative tilt being read from the inaugural speech beyond what was known before. Perhaps we can read something into the technology shares turning out to be the leading S&P sub-sector gauge, whilst healthcare shares and utilities, the latter often seen as ‘bond proxies’, lag. They remained in the black.

President Trump’s inaugural speech itself—the shortest since Jimmy Carter’s in 1977—did not bring any further information about what he will do now that he has his hands on the tiller. It was undoubtedly unconventional, populist, and strident—see the first use of the word “carnage” ever in a presidential inaugural speech. The clearest message and one of the speech’s key root words though was “protection”. That doubled down on a theme Trump flagged vigorously during campaigning. As indicated above, if accepted wisdom about the market’s distaste towards the theme is correct, it didn’t really show in trading on Friday.

“Infrastructure” was another key word, and one could expect that the fiscal surge denoted by its reaffirmation would be more to the market’s liking. But given that it was strongly tied to another key Trump pillar “jobs”, and—namely American jobs—perhaps the fiscal message that stock investors responded so well to in November was still old news on Friday.

It was a historic day, but it provided stock markets with few answers to key questions and little further reason to add fresh concerns either.

That will keep potentially destabilising uncertainty going for now, though it does leave the door open for the return of the optimism that stocks rode in November and early December.

For the very near term, the main concern for investors and traders is that markets remain ‘overbought’ by almost all gauges of momentum and valuation. Routine consolidation, at least, is still required, regardless of the social and political importance of the day.