Love him or hate him, there is little doubt that Donald J Trump, 45th President of the United States, has an ability to create reactions whatever he says and does.
Social media and town squares across America have already seen the reactive opinions to his rhetoric and actions, but the often-unreported response to his Presidency has come where it most affects the hip pockets of everyday investors.
Since the election in November it’s been interesting to note the reaction of financial markets to his pending Presidency. At the end of January, the Dow Jones Industrial Average, the most commonly cited measurement of stock prices and hence investor confidence in the U.S, passed through the 20,000-point mark for the first time. By comparison the index sat at 17888 on November 7th, the day before the election. That’s an increase of almost 12% in just under 80 days, or around 50 points on average each day of trading. There aren’t many investors who will be unhappy about that.
Australian share markets have benefitted from the positive reaction across the Pacific. From a low of 5238 on election day the All Ordinaries index has climbed to a high of 5857 before reducing to 5655 on February 6th. Despite the recent drop the index is still tracking at 417 points or 8% higher in the last couple of months.
Prior to the election many pundits were predicting a negative impact for the economy should a Trump Presidency come into effect. Instead financial markets have embraced his arrival. So, where has the change in mood come from? When you look at the facts it’s not hard to see why.
Trump has been a very successful businessman – he is pro-business and in favor of bringing jobs and money back to America with a series of tariffs planned for introduction, a move to lower tax rates and a desire to deregulate many areas of industry. Businesses see him as a catalyst and that’s good news for investors. He intends to spend a considerable amount on improving the U.S. infrastructure and his reluctance to support environmental issues, criticized by many, will be seen as a cost reducer for many industries forced to pay large sums in compliance costs.His initial presidential actions, including the signing off on two previously mothballed pipeline projects, has seen confidence increase as he shows a willingness to follow through on his pre-campaign promises.
All potentially good news for US stocks but is this a positive for Australia? There’s little doubt that Australian market sentiment for shares follows that of the United States. If their share market rises so does ours. His plans to deregulate financial markets could be a plus for Australian financial institutions exposed to US earnings.There is some thought that the proposed infrastructure spend could be a positive catalyst for our mining industry although it is uncertain to what extent this will impact. Australia will not suffer from tariff controls as much as other U.S. trading partners such as Mexico and China, and although the Trans Pacific Partnership Agreement has been torn up this was to some expected regardless of who won the election.
The US dollar has painted a slightly different picture. After declining nearly 3 cents against the $US since the election the AUD has seen a steady increase since the end of December from a low of $0.7175 on December 24th to a current level of $0.7674 on February 4th. This has largely restored much of the losses sustained since the election result and reflects increased confidence in the economy and its performance plus a settling in of the understanding of Trump policies.
So, will the share market rally continue? The continued growth of the U.S. economy has many believing that it will but others aren’t so sure. President Trump has shown a willingness to push the boundaries of his authority and the risk of a backlash from many quarters creates uncertainty. If there is one thing investors don’t like it’s uncertainty. If Trump faces opposition from the courts or Congress to many of his measures it may see a market cooling, which will affect the share market performance in this country.
It’s always difficult to predict the vagaries of the market in any situation – with a new U.S.President determined to shake up the status quo and test the boundaries of the Constitution, the predictability of the market place becomes even more of a lottery – and what that will mean for Australia is anyone’s guess.
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TGFS Financial Planning is an Authorised Representative of Consultum Financial Advisers Pty Ltd. ABN 65 006 373 995 AFSL No 230323 (Consultum).This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek advice from a financial adviser and seek tax advice from a registered tax agent. Information is current at the date of issue and may change.