Economic fundamentals, sooner or later, are behind market moves

Investors are asking if Trump’s pro-growth policies will ever be implemented

Traders work on the floor of the New York Stock Exchange this week. Shares have traded nervously in the face of political concerns. Photograph: AFP

Traders work on the floor of the New York Stock Exchange this week. Shares have traded nervously in the face of political concerns. Photograph: AFP

 

Financial analysts have struggled to interpret and predict the impact of the Trump presidency on the markets. Initial expectations of market turmoil and a decline in the US dollar proved misplaced. Instead the “Trump trade” has sent the US currency and the Dow Jones index to new highs. Investors seemed happy to ignore the economic and political risks of the Trump presidency, concentrating instead on his promises to cut business regulation and taxes, and boost growth.

The question now is whether the mood change we have seen this week is a temporary aberration or something more fundamental. There is no doubt that the market shakes of the last few days have been at least in part politically inspired. The stronger dollar, in particular, had been driven by expectations of stronger growth and higher US interest rates. Now investors are starting to ask if Trump’s pro-growth policies will ever actually be implemented.

The clearest casualty has been the US dollar, which has lost all the gains it made since the US election. Analysis is complicated here by the recovery of the euro, which has made significant gains, as evidence builds of a euro zone recovery. US stocks are also nervy, particularly bank shares which were seen as beneficiaries of less regulation. With the earnings season coming to an end, political factors are now likely to dominate the headlines for the next few months and who knows where that will lead.

The other key factor, of course, will be the underlying evidence of the health of US economy. The markets were boosted in Trump’s early months by strong economic signs in the US and a more favourable outlook internationally, seen as favourable to US exporters. On any measure this has driven US shares to tasty enough valuations, pricing in significant future profit gains. This is why weaker data – such as this week’s US housing figures – quickly give investors the shakes.

Whatever happens to Trump, it may well be this flow of US and international data which will provide the fundamental underpinning for market moves. Political factors may drive money in and out of safe havens, such as gold and US and German treasuries, but the lesson of recent months is that economic fundamentals, sooner or later, underlie everything.

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