Scandals, infighting, chaotic policymaking, a pugilistic and an isolationist approach to diplomacy that has alarmed America’s traditional allies – the first six months of Donald Trump’s presidency have been nothing if not dramatic. It’s an old cliché that stock markets hate uncertainty but the S&P 500 continues to set all-time highs and 2017 is shaping up to be the least volatile year on record. What gives?
Despite the endless political drama, bored traders have been trying to stay awake. Over the first five months of the year, the difference between the S&P 500’s average daily high and low points was just 0.56 per cent.
How small is that? Very. There has never been a year characterised by such little movement, according to LPL Research. Wall Street’s so-called fear index, the Vix, is at its lowest levels in almost quarter of a century.
You would have been hard-pressed to find anyone who would have predicted that a Trump presidency would be accompanied by the quietest financial markets in history. Prior to November's presidential election, a study by US economist Justin Wolfers warned stock markets would likely plunge up to 15 per cent stock in the event of a Trump victory. Citigroup economist Willem Buiter cautioned that the uncertainty triggered by a Trump presidency could trigger a global recession. Eight Nobel economists and World Bank chief economist Paul Romer expressed alarm at Trump's promotion of "magical thinking and conspiracy theories over sober assessments of feasible economic policy options".
It’s true that markets were quick to change their mind following Trump’s victory. Stocks surged as investors belatedly cheered Trump’s promises of tax cuts, infrastructural spending and deregulation. A new narrative was embraced: Trump would be a business-friendly dealmaker and rein in his pre-election recklessness.
That hasn’t happened. Legislatively, precious little has been achieved, and Wall Street has grown increasingly sceptical about that situation changing any time soon. The attempted Muslim ban, continued allegations of Russian collusion, the possibility of impeachment, the marked deterioration in US-Europe relations, the reputational damage caused by America’s withdrawal from the Paris climate accord – if anything, Trump has lived down to expectations.
Investors’ apparent insouciance is all the more notable given the alarm in the business community.
“It was what the US has come to expect four months into this presidency,” Bloomberg editorialised in the aftermath of Trump’s visit to Europe last month – “an embarrassing display of swaggering incompetence.”
Worries about the stability of Trump's leadership are clearly "reasonable", said former Federal Reserve chairman Ben Bernanke. Clearly puzzled by Trump's temperament, the mild-mannered academic went on to describe Trump as a "very unprecedented, unusual person", adding that markets tend to be "very blasé about political risk, until the very last moment".
The recent withdrawal from the Paris climate accord was condemned by dozens of US chief executives, ranging from Goldman Sachs head honcho Lloyd Blankfein to General Electric CEO Jeff Immelt.
There have been short-lived bursts of Trump-related market anxiety. Stocks briefly tumbled following a ridiculous press conference in January that provoked horror and hilarity in equal measure. Last month, stocks suffered their biggest one-day drop in eight months as controversy deepened following Trump's sacking of FBI director James Comey.
The latter selloff was heralded by many as marking a pivotal change in market sentiment; the long-awaited Trump slump was coming. Instead, it was a mere speed bump; within a week, equities were trading at fresh all-time highs. As one analyst put it recently, it seems that markets would survive “if the Trump administration disappeared or got beamed into space”.
There are good reasons, however, why markets have tuned out from the Trump dramas, the main one being that stocks are mainly driven by financial rather than political considerations. Right now, the financial picture looks rosy.
US first-quarter earnings rose 14 per cent, the biggest jump in six years. Analysts expect a double-digit rise in earnings in 2017 and again in 2018.
Global economic volatility is at its lowest level in over 40 years, according to JPMorgan. As a result, global stock market volatility is well below normal levels, especially in Europe, where a strong earnings upturn is under way.
Quite simply, the economic fundamentals look good, and have for some time. The US bull market pre-dated Trump and will not easily be derailed by him. Ritholtz Wealth Management money manager Ben Carlson has pointed out that presidents “have far less control over the markets than most people would have you believe”.
Policy decisions may take some time to affect the economy and presidents cannot pull “magical levers” that “force stocks to rise or fall”. Carlson wrote those words in January; they remain true today. Even if you take a dim view of Trump’s abilities, it doesn’t follow that stocks should necessarily fall.
As far back as 2014, Carlson’s colleague, Reformed Broker blogger Josh Brown, was pointing out that investors have become “increasingly agnostic about the news of the day”. The attitude has been that bad news is to be bought, the end result being market pullbacks have become increasingly short and shallow.
Still, while Trump is currently a peripheral factor in the minds of investors, this may not always be the case. Iconic bond investor
spoke for many chief executives earlier this year when he complained that Trump’s threatening of companies on Twitter was evocative of Mussolini-era Italy. More recently, billionaire Alan Hassenfeld, former head of US toymaker
, complained that business owners are unnerved by the uncertain geopolitical environment.
“Right now we don’t know whether we are friendly with Mexico, whether we are friendly with Canada, whether we are friendly with China, whether we are friendly with Russia,” Hassenfeld said. “We don’t know what the rules of the game are. They are changing constantly”.
That was echoed by Larry Fink of Blackrock, the world's largest asset manager, who warned that CEOs are unlikely to increase investing unless they get more certainty from Trump. There is now more policy certainty in Europe, said Fink, which will likely result in the region outpacing the US in terms of economic growth.
Investors appear to share Fink’s take: Europe and other non-US stock markets have comfortably outperformed the US in 2017, with the gap widening in recent months as the Trump-related dramas piled up.
The fact that the US stock market is strong and stable doesn’t mean investors aren’t concerned about Trump. Last month, high-profile finance professor Jeremy Siegel predicted that the Dow Jones index would jump 1,000 points if the president was to resign.
At the same time, concern is muted. Trump’s negatives are dwarfed by a benign financial environment. Investors will always prefer strong economic data and political uncertainty to poor economic data and political certainty. If things change, and political shenanigans begin to dampen growth, then markets might not seem quite as Trump-proof as they do today.