T+19. Nineteen days since President Donald Trump’s inauguration on 20 January 2017, nearly three months since his election and the outlook for investors is at the same time more clear and less certain.
It is more clear insofar as President Trump has already begun implementing measures addressing his campaign themes— trade, immigration, deregulation, infrastructure spending, and corporate tax reform — instead of turning his attention to perhaps less contentious topics.
It is less certain as far as the ultimate form these initiatives will take. The recent executive order on immigration will only last for 90 days and could be extended in modified form. The impact of the executive order on reduction of financial sector regulation is limited and it will require Congress to meaningfully change the landscape. The administration’s trade concerns have now widened beyond China’s currency to include the euro.
This uncertainty, and the realisation that implementing campaign promises is likely to take longer than expected and may not achieve the desired aims, can be seen in the market’s reaction. Following the initial surge in equity markets, the US dollar and bond yields in the month after the surprise election results, US Treasury yields have moved down from 2.6% to a range of 2.4%-2.5%. US equity markets have been mostly flat and small cap stocks have in fact underperformed large cap stocks. Half of the initial rally in the dollar has reversed (see Exhibit 1).
Exhibit 1: Selected asset returns since 8 November 2016
- Small cap versus large cap shows the relative return of the Russell 2000 compared to the S&P 500, indexed to 100, shown on the left-hand scale.
- The US dollar is the indexed level of the US Dollar Index (DXY), shown on the left-hand scale.
- The US Treasury is the yield of the US 10-year Treasury bond, shown on the right-hand scale.
These diverse reactions reflect both the promise and the peril of the proposals of President Trump and the Republicans. Increased trade restrictions, attempts to influence the value of the dollar, significant fiscal stimulus may well have impacts that are negative for US growth and/or inflationary.
On the other hand, a stronger US dollar, decreased regulation, repatriation of offshore corporate profits, modest fiscal stimulus and inflation, would likely benefit small capitalisation US stocks relative to large capitalisation stocks. Indeed, our multi-asset team is overweight the small cap part of the market.