Trump trade trepidation for stocks

Which Trump-effect will hit stocks?

The ‘Trump-trade’ has come off the rails at least for now.

A rip-roaring run into the end of the year took all major U.S. indices to new record peaks, and the Dow Jones Industrial Average got less than 4 tenths away from the ‘magic’ 20,000—but no higher. That failure, albeit largely symbolic, seems to epitomise the return of doubt and scepticism after the exuberance, some of which looked ‘irrational’, that gripped stocks and the dollar soon after Donald Trump’s surprise election win.

Uncertainty is writ large in the market’s snail’s pace. The S&P 500 has gone 67 trading days without a decline of 1% or more, its longest boring streak since 2006, when it didn’t drop by 1% for 94 days between July and November.

The Dow’s price action coheres even less with an effervescent view you might get if you just looked at its run of new record highs. Despite them, its 1.07% range up to last Tuesday was its narrowest monthly range ever.

Things seemed to slow down even more after Trump gave his first post-election press conference. It may go down in the history as the most colourful 1^st presser by a President-elect, but more importantly, for stock market investors, he gave scant further info on previously floated policy themes like tax cuts, job creation, infrastructure revamps, and financial deregulation.

The property tycoon’s sudden decision to keep mum, combined with existing concerns on earlier protectionist statements, a predilection for calling out huge American corporations and a general air of personal volatility that tends to make headlines, were all reason enough for investors, belatedly, to take to the sidelines.

Is 25 minutes of Trump enough?

That makes Trump’s inauguration day—particularly the speech he will deliver after being sworn in—all the more important for global markets.

For one thing, there’s a historical pattern that shows all inauguration days are pivotal for U.S. stock markets. In the first month after a president is admitted to office, the market tends to slip about 0.7% on average, looking at data back to 1928, though the move tends to be more if the new President is a Democrat. Then major indices tend to retreat by over 2%.

More to the point, investors hope that the president finally addresses the major themes represented by the slogan “Make America Great Again”, in more detail. For the stock market, the most important of these is the one on economic renewal and growth, by spending big. That growth will partly be defined by the continued increase of jobs, especially in the manufacturing sector.

But the Trump trade in the stock market has gone beyond the broad factory sector and also includes energy producers—particularly oil firms, big banks, and techs. After the U.S. energy sector topped all others in 2016 with a 24% leap, the biggest since 2009, markets will want to know whether the content of what is expected to be a 20-25 minute speech in itself, warrants investing further.

Holders of shares in financial sectors will be thinking along similar lines after that segment advanced 20% on the back of gains by Goldman and JPMorgan of more than 30% apiece.

U.S. Big Techs have not lagged since Trump’s win, despite their uncomfortable position with a view to mooted policies that would restrict overseas hiring in the industry, particularly from India, and its general ethos of ‘liberalism’ no matter how superficial it might be.

Chip maker NVIDIA’s freakish 224% rise skewed the reading for the S&P tech sector, but investors are wondering if moderate though respectable gains across the Nasdaq Composite can be repeated or preferably bettered this year.

At the other end of the scale, one of the standout losing sectors last year was health care—meaning mostly pharma. It is one of the key corporate areas where the president elect has directed his most focused antagonism; particularly on the issue of drug pricing. After the sector fell 4% in 2016, the details of the new administration’s plans to clamp down on ‘price gouging’ will put shares of companies like Mylan, Valeant, and giants like Merck, Pfizer and Allergan back in the firing line.

All in, providing anything like comprehensive detail on most of the stock market’s key interests and concerns sounds like a lot to ask, and in all probability, Trump won’t mention the complete suite of economic policy pushes that he outlined in his campaign.

The Donald

However, any amount of further meat on such plans, like corporate tax cuts, job creation and finreg relaxation, will probably refuel the stock market rally, almost across the board. How far the boost will take the market will be down to the choice of details in Trump’s speech. The main problem is that fine details are likely to be absent. It will be pretty much impossible for Trump to know them this early. Furthermore much detail of policy emerges from the legislative process itself. Policy will inevitably be shaped further in significant ways within the Trump administration and by Capitol Hill itself.

That means straight lines higher for bank stocks and extended direct declines by drug and car shares are unlikely.

As to the Trump policy-thrusts which the corporate America has reacted negatively to, thus far—trade restrictions and stricter immigration, the outlook is perhaps even more uncertain. Trump and his lieutenants have indicated they will move on their pledge to leave NAFTA in their first 100 days, but beyond such threats, there are no certainties on ‘if’ or ‘when?’, or even ‘how?’ since opinion on whether such a move requires Congressional approval is divided.

But what about ‘Trump the unpredictable’? There is an outside chance that his speech could be peppered by off-the-cuff impromptu remarks. He could even dump his speech entirely. He became known for having no speech prepared on several occasions during campaigning.

If that happens, it would it be even less possible to forecast the immediate and longer-term impact of his inaugural address on stocks. Either way, assuming that side of his personality is not absent from his 4-year term, the inherently unpredictable implications point to increased market volatility across the board.