The market’s gone nuts since the election. Confidence in Trump? Yes—but only among certain sectors, and for certain people. What else is new?
FROM THE DAILY BEAST | DECEMBER 22, 2016
President-elect Donald Trump campaigned on a promise to restore jobs and wages to those of the working class who have been hammered by decades of lower employment, closed factories, and waning communities. Those who have been hard-hit by the dual forces of globalization and technology flocked to his message, convinced with good reason that the political class had abandoned them and that only a radical choice for president had any chance of reversing or at least halting these trends.
Yet, since his victory, the preponderance of benefits has gone not to the 99 percent but to the much-reviled 1 percent of which Trump is of course a card-carrying member. Over the past month, U.S. stock markets have been roaring. The S&P 500 is up nearly 6 percent, while smaller company stocks have soared on average more than 15 percent. Granted, the noise of bulls stampeding has been trumped, yes, by the incoming president. But that doesn’t alter the fact that Wall Street has responded to the election of Trump with a resounding “for he’s a jolly good fellow” rally.
It didn’t look like that would happen. Before Nov. 8, the assumption in financial markets was that a Trump victory would lead directly to a stock market sell-off and financial market turmoil. Investors strive to “price in” the effects of future events (and usually wildly overshoot in one direction or the other). The assumption was that Hillary Clinton would be president and that a status quo for the markets and the Federal Reserve would follow. And so it was assumed that a Trump victory would be unexpected and unsettling for investors, who would then dump stocks and regroup.
Instead, U.S. stock markets responded with the best post-election month in decades. At the same time, bond yields went up sharply on the expectation that a Trump presidency would lead to inflation-producing tax cuts and infrastructure spending. That move, with bond yields rising and stock markets rallying, was cemented last week when the Federal Reserve not only raised short-term interest rates but announced its intention to follow that with three more 25 basis point increases in 2017.
The rally has not been indiscriminate. In fact, it has been skewed heavily toward companies and sectors that investors assume will benefit from Trump largesse: industrial companies like Caterpillar that might gain lucrative infrastructure contracts, and mining companies such as Freeport-McMoran whose metals might be in higher demand. Financial stocks such as Goldman Sachs have done spectacularly, graced with the prospect of a weakened Dodd-Frank law and a slew of deregulation. Meanwhile, health care companies that might see chaos with a repeal of Obamacare and technology companies such as Facebook and Amazon that have been so successful in recent years lagged significantly.
The Trump rally has been strong but not broad, and unless you are a trader focusing on those sectors that have done well, or a plain old holder of a stock index that has benefitted, you are more likely as an average investor or as someone with holdings in a pension fund to have done OK to badly in the past month. That’s because bonds—which comprise a larger share of more retirees’ portfolios—have sunk, and rapidly.
Bonds were due for a setback regardless of who won the election. In fact, bonds have been on a 30-year run that was likely to come to an end sooner or later. But the sharp reversal in bonds combined with the sharp gains in certain stocks suggests that a Trump presidency will see the preponderance of gains for the very classes that Trump as a candidate ran against.
Not even the most robust trickle-down theory suggests that equity market gains create jobs. Yes, the late 1990s internet-fueled bull market did lead to a “wealth effect” that temporarily boosted consumer confidence and spending. That was based on shaky foundations, however, and led to short-term consumption rather than long-term wages and job gains. While equity markets doing well certainly helps pension and 401(K) plans, those tend to be bond-heavy and equity-light. Whatever gains have accrued from stocks lately have probably been offset by losses in bonds.
Some modest inflation might actually be good for economic activity in the United States. In that sense, the Federal Reserve raising rates rather than endlessly continuing a policy of easy money might be a good thing for us all. Here too, however, it matters where there is inflation. If the price of homes starts going up, or if housing affordability goes down because mortgage rates make monthly payments more of a burden, that will fall disproportionately on those with limited wages or on retirees with fixed income. If the cost of goods starts going up either because of domestic inflation or because of various punitive trade policies with Mexico and China, that will also hurt the very members of the working class that Trump campaigned to help. Only if there are commensurate gains in wages and employment will that not be the case.
For now, financial markets are betting that companies will be the primary beneficiaries of Trump policies. Yes, some wage increases can be quite positive for companies, as that gives consumers more capacity to spend on the goods and services that those companies provide. More money in average pockets means more gifts bought at Christmas, more outings to Olive Garden. But financial markets are clearly assuming that wage increases will be much more muted than the benefits of deregulation and stimulus spending. They are assuming, in short, that regardless of whether workers do well, companies and financial markets will do very well.
And that is precisely what so many have revolted against, whether by supporting Trump or supporting Bernie Sanders in the Democratic primaries. We do not, of course, know what policies a Trump presidency will bring. We know only which way the wind appears to be blowing, given cabinet appointments to date and how markets have reacted. That wind remains cold to the workers and to the millions who have flocked to Trump. Could that change? Of course, but the cheer on Wall Street does not augur well for the plight of Main Street.
This need not be zero-sum. Wall Street could thrive along with Main Street. Both stocks and wages could rise, and bonds could be higher but still reasonable. At issue isn’t that companies and investors are welcoming a Trump era. At issue is that the benefits of a Trump era are clear to companies and investors without there being an equally clear benefit to workers, other than rhetoric and hope. Trump’s supporters will give him some time to demonstrate what’s in it for them, but not much. Companies and investors may be full of good cheer, but if they thrive while the rest don’t, the anger of this election season will look mild in comparison to what lies ahead.