“Inauguration Day is finally here and it could be a whole new world for investors after January 20th…”5
“May you live in interesting times” goes the Chinese curse. It also pretty much sums up many investors’ mindset as they await the inauguration of Donald Trump says Eric Stein, Co-Director of Global Income, Eaton Vance.
“Inauguration Day is finally here and it could be a whole new world for investors after January 20th. With a new administration in the White House, and Brexit and more key elections looming in Europe, investors should be prepared for more volatility and political uncertainty.” he adds.
“The main takeaway of a Trump presidency is the distribution of expected outcomes has widened dramatically. However, in the initial post-election period, markets focused more on the larger right tail of the distribution and reaction was punctuated by rallying equities, a stronger U.S. dollar and rising Treasury yields.
“Now, equity markets have been in a bit of holding pattern recently after their post-election rally, while Treasury yields and the U.S. dollar have fallen somewhat from post-election highs.
“Yet the big question is how markets will react after Trump takes the Oath of Office as the 45th U.S. president, and investors start to get more details on his administration’s policies and agenda.
What tone will Trump take in his inauguration speech on Friday?
“In his November 9 acceptance speech, Trump struck a magnanimous tone. He spoke of uniting the country and even congratulated Hillary Clinton on a hard-fought campaign. Trump also asked Americans to come together as a united people and reached out to those who didn’t support him. Those sentiments seemed to calm markets and focus investors on Trump’s pro-growth policies, and away from negative issues like protectionism and building walls.
To me, that tone was a very important driver in the markets’ initial post-reaction, says Stein.
“However, some of the market momentum has petered out a bit lately. The Dow Jones Industrial Average has stalled near the much-talked-about but not economically significant 20,000 mark, while the CBOE Volatility Index (VIX) has perked up a little after falling to a two-year low.
Uncertainty over Trump’s policies could be a factor.
“However, I think Trump’s behavior during the transition period is the main driver of the recent market action. Certainly, he has lashed out at the media, Clinton, intelligence agencies and others on Twitter and during press conferences. In short, he has been acting more like a candidate than a president.
“Markets should not underestimate the chance for a transformational positive economic environment should Trump combine fiscal and regulatory reform along with a more positive tone.
But nor should they discount potential downside risks should Trump continue with his negative tone and focus more on trade protectionism than on pro-growth reforms.”
Stein notes “Both outcomes are very possible, but I think it’s almost as important to watch tone and messaging as it is to watch the specifics of policy proposals.”
“The inauguration speech is obviously an opportunity for Trump to act more presidential, and investors will be watching and listening closely. They will also focus on the communication style after the inauguration, and any details on what Trump plans to tackle first and how.
“Markets have been taking a wait-and-see attitude, but that may soon change. And that likely means more volatility as we get more details on potential tax cuts, regulatory changes, infrastructure spending and other policies,” he concludes.