Markets don’t like uncertainty.

Uncertainty and market volatility tend to increase during the run-up to U.S. presidential elections, but the 2020 campaign seems more divisive than usual.

Given the binary nature of the U.S. presidential election, the election’s outcome will likely favour certain industries while adversely affecting others. Markets don’t like that kind of uncertainty. Now nine months into the COVID-19 pandemic, investors are cautious, and markets are already anxious.

The state of the (economic) union

So far, massive fiscal stimulus enacted after the virus outbreak have been unable to bring the general U.S. economy in line with the U.S. stock markets. The likelihood of more monetary and fiscal stimulus is helping to keep interest rates historically low. Additionally, the Federal Reserve has said it has no intentions of increasing interest rates for fear of further diluting the recovery. This may help stocks in the “reopening trade,” that is, those exposed to economic recovery.

But questions about what kind of policies to expect after the election are adding to market uncertainty. That’s because the outcome of the contest between incumbent President Donald Trump and former Vice President Joe Biden has the potential to significantly affect public policy and how industries and companies do business. Here’s how we think policy and industry could be affected in each scenario.

A victory for former Vice President Joe Biden

A Biden victory could likely mean higher taxes and increased regulation of certain industries. It may also include increased federal spending on infrastructure and clean energy, and criminal justice reform.

Biden has promised to restore and augment the Affordable Care Act (ACA). He also promised to increase capital gains tax rates and create programs to make participation in the U.S. economy more diverse and inclusive. A Biden White House benefits hospitals and health care providers, and pressures drug companies and financial services companies that could be subject to more stringent regulation.

On the other hand, we have had almost four years to observe what a Trump presidency looks like. A second term for President Donald Trump could deliver more changes to immigration policies and a possible U.S. exit from NATO. The President is also likely to continue weakening the ACA, if not fully repeal it. He may also try to overhaul entitlement programs like Medicare, Medicaid and Social Security.

President Trump’s policies could benefit the financials sector by supporting a low-regulation environment. Defence-related companies could also see support through increased federal spending. While his changes to the corporate tax code have generally benefited businesses, the possibility of continued trade disputes and more isolationist policies could hamper free trade. This prospect continues to worry some investors.

Don’t overlook the importance of congressional race outcomes

The expectation that Biden would reverse some of the Trump administration’s pro-business policies may pressure corporate earnings, which are already uncertain because of the pandemic.

Research indicates, however, that stock performance has less to do with who wins presidential elections and more to do with the overall makeup of the U.S. government. Therefore, the outcomes of the congressional races are arguably more important to the markets.

A Democratic majority

A “blue wave” sweep of a Democratic White House and both houses of Congress would make it easier to enact swift policy changes that could pressure stocks. A Biden victory coupled with a split Congress, however, would make it much more difficult for the new president to enact his policy proposals.

A Republican majority

The tense U.S./China relationship continues to trouble global markets, and the Trump administration’s confrontational approach to China is well documented. If trade conflicts, retaliatory regulations, or supply chain disruptions increase, they would weigh on an already weakened global economy. This would be an unwelcome development as economies begin to look toward recovery beyond the global health crisis. The Democratic challenger says he will negotiate aggressively with China.

However, it’s expected that U.S./China relations would improve during a Biden presidency.

What happens if the Presidential election is contested?

The final, and very sobering, concern as we head into the campaign season’s final weeks is the growing possibility of a contested election. In the case of a close result, or in disputed results from mail-in and absentee ballots, we might see the failure to achieve a peaceful transition of power for the first time in U.S. history. Such an event would very likely upset global markets considerably until the U.S. reaches an accepted resolution.

The current market uncertainty is significant and distracting. However, we don’t think it’s in anyone’s best interest to try and predict the U.S. election’s results. Instead, we continue to focus on the specific business case for each stock we select for our portfolios. Likewise, we think investors should consider doing the same—take a longer-term view and stick to an investment plan.

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Trump may not get its way on pro-growth initiatives.

The markets showed a clear pattern in the weeks following President Donald Trump’s election victory: stocks rallied, Treasury yields rose and the U.S. dollar strengthened. Some investors and commentators called it the ‘Trump trade’.

However, according to Eric Stein, Co-Director of Global Income at Eaton Vance, a leading global asset manager: “Fast forwarding to today, although equity markets seem to hit new highs daily, yields on the U.S. Treasuries have fallen this year and the dollar has weakened recently. Some of this may be doubts that the Trump administration will not get its way on pro-growth initiatives such as tax cuts and infrastructure spending.”

Mr Stein says “Although there are a wide range of potential outcomes, we still believe the U.S Treasury bond and currency markets may have gotten too pessimistic on the potential for tax cuts and infrastructure spending.

“We would also urge investors to maintain a long-term view and not get caught up too much in the daily drama and short-term noise in Washington,” he says.

He outlines the reasons why ‘Trump Trade’ has faltered.

“Some of the recent decline in Treasury yields, inflation expectations, and the dollar can be attributed to U.S. data that has been somewhat weaker than expected. However, the unwinding of the Trump trade has also been driven by doubts the administration will able to make good on its policy changes to promote economic growth. For example, there are questions over health-care reform and the chances of an overhaul of the tax code.
“At the same time, it’s easy for investors to get distracted by the political fireworks in Washington, such as this week’s testimony from former FBI Director James Comey. I was reminded of this recently. A few weeks ago right after Comey was fired, I asked participants at our Fixed Income Group morning meeting what probability they assigned to Trump not serving his full four-year term. It was interesting what a passionate and interesting discussion ensued following my question, with very different answers across the people attending the meeting.”

He says “Don’t bet against a Trump comeback.”

“While many investors are now completely discounting the possibility of any accomplishments from the administration, I wouldn’t count Trump out.
“President Trump is certainly a polarizing figure who makes it tough for many to have an unemotional conversation about him. Whether you like him or dislike him, any neutral observer would have to admit that he has shown the ability to come back from many personal and professional setbacks in his life. That’s one reason why Treasury and currency markets may be too pessimistic on the potential for reforms right now.

“The easiest reforms for the administration would be in the area of regulation because that is where President Trump is far less dependent on the Congressional legislative process. If he can start with some easy wins in the area of regulation, maybe there will be the potential for some progress on the tax and infrastructure fronts as well.”

Mr Stein says “Investors should always be on the lookout for both sides of the distribution of market and economic outcomes when assessing President Trump (pro-growth reforms vs. Twitter spats and self-created distractions). When markets get too focused on only one side, they may start to turn the other way.”

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Markets react to Trump’s first speech to Congress.

The market’s overwhelmingly favorable reaction to President Trump’s first speech to a joint session of Congress was not necessarily surprising: President Trump veered away from the more protectionist and nationalistic tone of his inaugural address to instead deliver a more hopeful, conciliatory and unifying speech.

He sought to reassure nervous congressional Republicans that he is presidential, while at the same time, he tried to open the door with congressional

Democrats on some shared objectives, such as paid family leave and infrastructure.

Yet, however strong the speech was on style and however bullish the reaction has been among certain risk markets, President Trump’s speech did not significantly change the stubborn facts about policymaking in Washington.

The two priority issues for President Trump and congressional Republicans in 2017 – healthcare overhaul and reform of the tax code – are two of the most complex and time-consuming issues Congress can tackle.

To provide some context: Congress has not undertaken tax reform since 1986, when President Reagan had to use significant political capital to advance it (and it still took him several years). Similarly, it took President Obama 14 months to pass the Affordable Care Act (“Obamacare”) at a time when he had bigger majorities in Congress and a higher approval rating than President Trump currently enjoys.

Importantly, there remains very little agreement among congressional Republicans on how to replace Obamacare and how to reform the tax code. On healthcare, while there is broad agreement that Obamacare should be repealed, there is not necessarily consensus that there should be a replacement, not to mention a common vision about what a replacement may look like.

On tax reform, even with President Trump’s tacit endorsement of the controversial “border adjustment tax,” a centerpiece of the House Republican tax plan, there remain significant obstacles to the BAT in the Senate.

While tax reform can get done without the BAT, it would likely result in a smaller plan that would need to be reworked, which could easily mean a bill is not signed into law until 2018.

This is a long way of saying that while President Trump’s first speech in front of Congress was a success in many ways, it does not necessarily change the inherent difficulties of policymaking, especially in the complex areas of healthcare and tax reform.

By Libby Cantrill, PIMCO’s head of public policy.

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Bob Baur

On January 20, 2017, Donald J Trump was inaugurated as the 45th U.S. president. The implications of his subsequent actions vary across the globe.

Principal Global Investors’ Chief Global Economist Bob Baur, Global Investor Strategist Seema Shah and Portfolio Manager Binay Chandgothia hold different views on Trump’s first month in office, but agree that the economic impact is likely to spread far beyond American shores.

U.S. Focus – Bob Baur, Chief Global Economist

“Thirty days in, we are still waiting to see whether President Trump’s first major economic policy will focus on tax and regulatory reform, or restricting trade in an effort to reduce the U.S. trade deficit. Tax and regulatory reforms have the potential to be a big stimulus to economic growth, jobs, and capital spending. Trade restrictions, on the other hand, could set back global growth and have negative consequences for the U.S. economy.”

“The actions taken by the new administration are
so far very much in line with campaign promises. It does appear the tax and regulatory reform is being placed first on the agenda, with real positive potential.”

Europe Focus – Seema Shah, Global Investment Strategist

“President Trump certainly doesn’t waste any time! With most of his policy announcements and promises aimed at protecting U.S. trade prospects, Europe has experienced an unsettling 30 days. Talks about a potential trade deal between the United States and the European Union (EU) have already been declared dead.”

“While U.S. criticism of German external imbalances is not new, given Trump’s negative sentiment towards multilateral trade deals, there is certainly a risk of punitive action. On the other hand, Trump’s preference for bilateral trade deals may benefit the UK. He has shown a strong interest in signing a free-trade agreement with the UK. If this materializes, it would improve UK prospects at a time when most economists are forecasting tough times ahead.”

Asia Focus – Binay Chandgothia, Portfolio Manager

“While politics is incredibly hard to predict, the feeling gaining ground is that, Tweets and tough-talk aside, actual policy will not destroy the economic links built over the years. Impact will be largely sector-specific, which – in the context of relatively cheap market valuations and potentially higher global growth – could drive Asian equities higher.”

By Bob Baur, Chief Global Economist; Binay Chandgothia, Portfolio Manager and Seema Shah, Global Investor Strategist.

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How will Trump’s actions affect investors going forward?

Due to the lack of a filibuster-proof Senate majority, Trump was never likely able to get much passed through Congress except for revenue-neutral budget bills, but he will clearly continue to use his quite broad executive and regulatory powers, as well as his “bully pulpit,” to re-shape the globe.

The analysis below concisely explores the areas where his policies can be most fully implemented and how his presidency may affect investors going forward.

Immigration

The complaints about building a Mexican border wall have always seemed quite excessive, as there has long been a wall in many sections, which was greatly expanded by Obama without him being pilloried for such. Many countries have border walls, including one recently erected by liberallyminded Norway. Trump is using tactics within the current budget to provide the funds for accelerated construction, but expects Mexico to pay for it eventually. It is noteworthy that only a small fraction of illegal immigrants are Mexican, with the vast portion from countries south of Mexico, and that there are now stronger efforts to stop the flow from them into Mexico, which could solve a major part of the problem.

Trump is clearly open to legal immigration, and will not discriminate by ethnicity any more than the current quota system does, but will restrict such from countries and persons with terrorist risk. Indeed, legal immigration may not decline at all during his tenure. He will also likely restrict H-1 visas (specialist work visas) and seek job and educational prioritization (reducing the number of international students in colleges) for Americans. As for deportation, it will continue along the same criminal-prioritized lines as under Obama, but in accelerated fashion, while sanctuary cities will be forced to comply with federal laws lest their critical federal funding is withheld. There are a few liberal states that, when using a simplistic measurement, send more money to the Federal government than they receive, and will threaten to withhold their funds, but they will likely withdraw when they discover the full consequences of such action.

Economics

In my opinion, there are many reasons to expect that a border adjustment tax will not be enacted, except in the case of a global crisis:

• It would require more regulation, not less (and is likely too complicated to explain to voters).
• It is not in Trump’s original plan and he is trying to fulfill his promises as rapidly as possible.
• He is not a full-blown protectionist but wants fairer trade with Mexico and China (a border tax, which is of questionable legality, is much more protectionist than targeted legal retaliatory tariffs) and will punish US companies who move jobs abroad. His main plan is to lower both corporate taxes and regulation so as to encourage production in the US, rather than use protectionism.
• It would be labeled a hugely regressive consumer tax hike, ruining his reputation with voters and giving his opponents significant ammunition.
• Countries would likely retaliate with a global protectionist war.
• Inflation would be likely even if the USD rose, which would raise interest rates and thus the Treasury’s interest expenses so much that most of the tax’s revenues would be erased.
• It would de-emphasize his power to target specific unfair tactics and decrease the number of victorious “deals.” Already, using Teddy Roosevelt’s “bully pulpit” style, he is achieving success in moving production to the US without regulation.
• He will not totally reject the border tax concept for the time-being because he can use it as bargaining chip/stick against countries, saying “at least, I can save you from Paul Ryan’s more protectionist plan.”
• Although the legality of such is debatable, a special border tax for US companies that move jobs abroad is possible, but such should not raise much revenue. A special border tax against Mexico is also a possibility, but is more likely just a bargaining threat.

If a border tax, which at 20% was estimated to raise $10 trillion over the next decade, is unlikely, then, in order to maintain the ten-year deficit neutrality required for the reconciliation process (which only needs a 50% approval in Congress), Trump will likely only start with a mildly lower corporate tax rate (not as low as he would like and perhaps phased in over several years) and lower personal income taxes targeted at the lower-middle class, both starting in 2018 (later than he had hoped). This would be funded with a mandatory corporate profit repatriation tax, greater US corporate tax base coverage, expenditure cuts and “dynamic scoring” (assuming the resulting economic growth will raise more revenue).

Retaliatory trade measures, already greatly increasing under Obama, will likely accelerate further, with China continuing to attract the vast majority of the cases due to its massive overexpansion in several industries that has attracted retaliatory measures from many countries, both developed and emerging. While there is less concern about across-the-board tariffs on Chinese goods due to currency manipulation, such are likely if the CNY devalues. It is also possible that the Trump Administration deems politically-motivated capital flight to be a non-economic factor and that for trade purposes, the CNY’s current “managed peg” is at excessively weak levels, as shown by the country’s large trade surplus.

As with many countries, infrastructure improvements will likely be accomplished by PPPs (Public-Private Partnerships) and incentives rather than directly by the Government. This is primarily due to fiscal budget constraints. In this regard, it is noteworthy that the budget deficit already is set to widen significantly after 2018 due to increased entitlement spending associated with the aging population.

Regulations

It is unlikely that Trump can change any social laws, as his conservative Supreme Court justice nominations will be filibustered by Democratic senators. He will, however, be able to appoint many Republicans to justice positions lower than the Supreme Court, as such do not require 60 votes in the Senate. Thus, the interpretation of many laws will likely become somewhat more conservative. He will likely de-fund Planned Parenthood, drawing much protest, so the need for private counselling will increase. Many other budget and regulatory cuts are certain, but such will need to conform fairly closely to the current budget allocations. As mentioned previously, passing any non-budgetary laws will be filibustered by Senate Democrats, at least for the intermediate term.

Environmental regulation will clearly be reduced. States and localities can continue to block some deregulations, but there is great danger that Federal funding will be withheld directly or indirectly from them. Deregulation would boost oil production, as well as some industrial and mining sectors, especially coal, significantly contributing to GDP. Not much has been said on nuclear power, but it is highly possible that Trump will reduce regulations for the construction of new reactors.

Foreign Policy

Both geopolitical and economic/trade factors will play equally large roles in Trump’s foreign policy, while Obama emphasized economic factors more greatly. There is little doubt that if there were not so many geopolitical disagreements with China among its neighbors and the US, that there would be less economic friction ahead. Unless these disagreements are solved, then conflict certainly lies ahead. China and the US would both be hurt by such, with China being much more affected economically and politically than it exclaims.

As for Russia, the US will likely cooperate on ISIS and other factors in which there is common interest, and sanctions should be eased relatively soon. As for Mexico, the outlook will likely continue to be tumultuous. Japan, if it learns to be flexible and creative in forging compromises, can actually greatly improve its ties with the United States, but it is often difficult for Japanese corporations and bureaucrats to embrace change, even if it is for their benefit. Relations with the UK will likely be strong, but those with the Eurozone will continue to deteriorate, although if Trump stops encouraging countries to exit the EU, not too much damage will result. The fact that Germany has agreed to start paying its mandated share for defense means that Trump can be satisfied with NATO’s burden being fairer and concentrate on encouraging its antiterrorism effort. Both Japan and the Eurozone will need to be careful that their policies are not considered “monetary manipulation.” Trump has just mentioned this phrase, although in the context of trade deals, as a trend that will be strongly countered, so what his Administration deems manipulation will clearly be a major policy decision for the world, including the Federal Reserve.

The Fed

As long as the FOMC does not become too disdainful of her leadership, Yellen will likely complete her term early next year, although likely very uncomfortably so. Who Trump appoints to the Board and as Chairperson, however, will be a key factor in how FOMC policy evolves this year, as they likely will be quickly approved by the Senate. A few traditional Republican names have been broached by experts, and Trump has shown some support for Kevin Warsh, but a more unorthodox choice is highly possible. Most analysts think that Trump will seek very dovish candidates, but as he complained about Yellen’s Fed being too dovish (although she has suddenly become more hawkish out of fear of fiscal stimulus, despite budget reconciliation likely being revenue-neutral), he might seek a moderate candidate. Such might also protect the bond market from losing faith in the Fed. Although he has courted some Wall Street titans during the transition, it seems unlikely that he would choose one to lead the Fed. Lastly, he likely prefers a reduction of the Fed balance sheet than aggressively raising interest rates.

The US Equity Market

Those who strongly dislike Trump (including most of the mainstream media, Democrats and orthodox policy experts, among others) are experiencing a heavy dose of schadenfreude about him and his policies, but US equities like his plan. The corporate tax cut is the most important factor in raising equity prices, but fewer regulations and stronger economic growth are also crucial. The market’s expectation for earnings are likely much higher than the current bottom-up or top-down consensus estimates, as few analysts are willing to incorporate a corporate tax cut into their projections until they can be sure of its parameters. Portfolio managers and speculators, however, are forced to predict that such a cut is more likely than not and, thus, have bought stocks. We too see such as likely, and thus, valuation ratios are likely much lower than consensus, with a PER on 2018 earnings of near 16 compared to nearly 18 for the latter.

We see continued upside by the end of the year, but there may be some disappointment and market corrections in the coming months as Trump needs to accept less tax rate cuts than he wishes. Within the equity market, those predicting a border tax, and, thus, major earnings growth for domestic producers, will likely be another cause for a market correction. As stated in the Teddy Roosevelt theme mentioned in earlier pieces, investors expecting laissez faire policies by Trump in matters of mergers, non-competitive price hikes or other oligopolistic practices will likely be severely disappointed and may also play a role in a stock market correction.

Summary

There is little doubt that Trump’s domestic and foreign policies conform to the “you are with us or you are against us” theory, as opposed to Obama’s conciliatory “new world” tenor. Such large pendulum swings can be very disruptive, but countries and corporations will likely have to choose sides. Those who choose to back him will likely benefit the most. Clearly, it is difficult to define Trump in political terms, as although nearly all of his cabinet members are either very conservative or of military background, his unorthodox conservative-populist vision, which is often loathed by Republicans, will control the agenda. Domestic unrest certainly could occur, but so far, there has not been such to a disruptive degree and it is very unlikely that if such were to expand that they would dissuade his actions or those of Congressional Republicans. Globally, the outlook is most precarious with China and much will depend upon new geopolitical agreements, which certainly can be achieved and perhaps best left for a more detailed report in the future.

By John Vail, Chief Global Strategist

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What’s in store for Trup’s first year?

With the inauguration of the 45th president imminent and the market’s high expectations for policymaking, what is realistic for investors to expect from Washington in 2017?

We think the bottom line is that governing is harder than campaigning. Many of the items that President-elect Trump and congressional Republicans are looking to tackle in 2017 – a healthcare overhaul, tax reform, infrastructure – are inherently complex and time-consuming, even with Republican majorities in both chambers of Congress. So, while we expect policymakers to focus on advancing the Trump agenda, there is a good chance that some of these agenda items slip into 2018 given the realities of Washington.

Key policy initiatives

Obamacare: Repeal and replace?

One of the primary issues of overlap between President-elect Trump’s policy agenda and that of congressional Republicans is the repeal of Obamacare. However, there is less agreement about what comes after repeal – with Trump and some Republicans advocating for a “repeal and replace” approach, while other Republicans supporting “repeal and delay.”

If Trump’s approach is pursued – which seems more likely – it could have implications for the timing of the rest of his agenda. Healthcare policymaking is notoriously complex and time-consuming; it took Congress 14 months to pass Obamacare after holding more than 100 hearings in the Senate and 80 in the House, and Obamacare still managed to pass only on a party-line vote. Also, the committees in Congress that would be tasked to write at least part of the replacement bill will also be in charge of the tax reform bill, another complicated and formidable undertaking. Lastly, Trump has promised that a replacement bill will provide “insurance to everybody.” While Trump may walk back from these comments, the pressure for congressional Republicans to deliver a comprehensive, Trump-endorsed healthcare overhaul has increased, which might take longer (most of 2017?) than many expect.

Tax reform or tax cuts?

Another area of agreement between Trump and congressional Republicans is the issue of addressing the country’s tax code to make it more competitive. However, there is less agreement about how actually to do this. House Republicans want to proceed with tax reform on the individual and corporate side, while Trump has put forth a plan that focuses on tax cuts. Tax reform – simplifying the tax code, lowering rates and broadening the base – is notoriously more difficult and time-consuming than tax cuts, since it necessarily results in winners and losers. Yet, many would argue that only tax reform – not tax cuts – at this point in the economic cycle would lead to real improvements in productivity and therefore sustainable economic growth. For this reason, we expect House Republicans to try to advance a tax reform package, at least initially.

But there is a long way to go from here to there. No bill has yet been written, and it is not clear whether Senate Republicans are on the same page as House Republicans, especially when it comes to more controversial topics such as the “border adjustment tax,” which would tax imports and exempt exports.

Assuming tax reform is pursued (not just tax cuts), it will likely take longer than most expect given its complexity and may be a smaller package (e.g., rates not lowered as much) depending on where Republicans fall out on different controversial issues (e.g., the border adjustment tax). While the market appears to be pricing tax reform to be completed in 2017, there is a real possibility we don’t see a bill passed and signed by President Trump until 2018.

Infrastructure

While this is a topic that President-elect Trump discussed often on the campaign trail and one where there is generally bipartisan support, Trump has provided few policy specifics, and this is yet another issue where the devil is in the details. Given the ambivalence many Republicans have for increases in non-defense spending, Trump may need Democrats to help pass an infrastructure bill. It is not clear what the appetite for that would be among congressional Democrats. So this also could slip to 2018.

Trade

Unlike the aforementioned issues, which need congressional approval, the White House has significant discretion around trade. Indeed, one of the first actions President Trump is expected to take is to withdraw the U.S. from the Trans-Pacific Partnership. While this move is expected, Trump’s approach to trade broadly is unknown: Does he follow the advice of his U.S. Trade Representative Robert Lighthizer, who worked under President Reagan and will likely use a more carrot-and-stick approach with trading partners like China? Or will he follow the more extreme and protectionist advice of Peter Navarro, the head of the newly formed National Trade Council? At this point, we don’t know, and as such, trade remains the primary area for a more “left tail” (downside) outcome.

By Libby Cantrill, PIMCO’s head of public policy

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“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.

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