Exuberant markets may not be factoring Trump risks

Cantillon: Trump’s policies threaten uncertainty about fiscal policy and borrowing

As people tend to say about their age – particularly as they get older – 20,000 for the Dow Jones Index is surely "just a number". Still, there is no denying that the rise in US share prices since the presidential election has been striking.

As news broke that Donald Trump was to become president, Dow futures – which predict how the market is going to trade – collapsed. Ever since, however, shares have only gone up.

The 20,000 level is a milestone, for sure, although the market will have to wait at least until next week to match it after the Dow came perilously close – peaking at 19,999.63 just before lunchtime on Friday.

Commentators have pointed out how, after the Dow broke 10,000 in 1999, it subsequently went to 11,000 as the tech share bubble continued, but later fell to below 7,000 during the economic collapse. It only moved back above 10,000 – and stayed there – in mid-2010.


Now the outlook is again uncertain. To say the markets have taken a positive view of what the Trump presidency might mean for the economy is an understatement. Buoyed by promises of lower taxes and higher spending on infrastructure, stocks have bounded higher, while US government bond prices reflect expectations of a pick-up in growth and inflation.

Massive changes

Perhaps it will all pan out as the markets expect. But there is surely some wisdom in the words of Larry Summers, the Harvard professor and former US treasury secretary, who referred on Bloomberg television during the week to the "extraordinary uncertainty" now facing the world economy due to massive policy changes promised by the president-elect.

The policies of Trump threaten uncertainty about fiscal policy and borrowing. And then there are the threats to act tough on trade, including erecting new tariffs, tearing up trade agreements and targeting countries such as Mexico and China, which Trump and his team claim are guilty of unfair trade practices.

The respected Peterson Institute for International Economics in the US has warned that a trade war could put millions of jobs at risk, many of them lower-skilled and lower paid.

So far, the markets seem to be pricing in all the good news and none of the risk. Who knows where this will go, but it is hard to believe that the extraordinary changes Trump is promising will not bring risks for investors in the months ahead.