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A year has passed since Donald Trump shocked the world by winning last year’s US presidential election. The news provoked a dramatic sell-off in Asian markets, and then a far more dramatic rebound. US stocks rallied, while emerging markets tumbled. The immediate belief was that a Trump presidency was a “game-changer” for the world economy and capital markets, and many feared it would be negative.
The Nobel laureate economist Paul Krugman made an instant prediction that markets would “never recover”, for which he has since apologised. The results have been a little different.
First, after the initial reaction that the election meant “America First” and that other countries — especially emerging markets — would be harmed by the advent of Trump, the rest of the world, led by emerging markets, has gone on to outperform, even though the S&P 500 has set a series of all-time highs. Growth in the eurozone and China reassured doubters.
US stocks’ underperformance was largely driven by the dollar, which strengthened after the election but then began a significant weakening, driven in large part by surprisingly strong European growth which helped the euro
Perhaps ironically, the Russian rouble has gained the most of any major currency against the dollar since the election. Turkey’s lira has been by far the weakest.
Greater attention was turned to Mexico, which is uniquely exposed to the US economy and stood to be harmed by Mr Trump’s policies on migration trade. After an initial collapse, the peso put on a strong recovery, but it has wobbled again in recent weeks amid talk that the Nafta trade accord could be endangered after all.
Despite the anger and turbulence that surrounded Mr Trump all year, the US stock market has enjoyed what might be its calmest year ever. In terms of average daily moves of the S&P 500, 2017 may beat 1964 (another turbulent political year) as the calmest year ever for US stocks. As for the popular Vix index of market volatility, which was set up in 1990, it hit an all-time low in September. The practice of “selling volatility” — or short selling the Vix — became highly popular and highly profitable. Anyone who bought the main short Vix index on election day would by now have trebled their money.
If the markets stayed calm, then consumers seemed even happier. Gallup’s regular measure of economic confidence leapt to its highest level in more than a decade immediately after the election, and has since stayed at levels not previously seen since the crisis. Fury among liberal opponents of Mr Trump is still more than counter-balanced by the enthusiasm of his supporters.
The same goes for businesses. The regular ISM indices of purchasing managers, highly influential in markets, had signalled a possible recession early in 2016, before it grew clear that China was adopting an expansive economic policy again. During 2017, ISM numbers in both manufacturing and services sectors hit their highest levels in more than a decade, since well before the crisis; again the recovery of confidence is palpable.
On the core issues of the economy, however, the effects of Mr Trump are less apparent. The unemployment rate continued a steady fall that started during President Barack Obama’s first term. Meanwhile, inflation initially rose, suggesting that growth was about to resurge, before declining again during the summer. Inflation is picking up again now, but the mystery of how unemployment can stay so low without provoking higher inflation remains. The clear trend of the Obama years remains intact and uninterrupted.
Meanwhile, the greatest economic disappointment for the Trump administration is the continuing anaemic performance of wages. After stagnating post-crisis, they appeared to have at last hit a rising trend in the last year of the Obama presidency. But despite the tightening labour market, wage growth has slackened off again under Mr Trump so far. This remains the critical economic issue for his administration, and for the new leadership at the Federal Reserve.
On the president’s signature issues, the market is sending mixed signals. On tax, many banks now track the performance of the stocks which pay the highest effective tax rate, and should logically benefit the most from a tax cut. The chart uses Goldman Sachs data, and makes clear that such stocks are lagging; the market remains unconvinced that significant tax cuts are coming.
On the issue of Mexican immigration, however, there is evidence that Mr Trump’s rhetoric is already changing behaviour. Arrests at the border have fallen very sharply (although they have started to rise a little in recent months). This implies that far fewer people are attempting to enter the country. Meanwhile remittances to Mexico rose sharply. In the past this has been driven by Mexican migrant workers’ fear that they would lose their jobs, and implies that many may be planning to leave.
As for the highly controversial Trump positions on coal and climate change, coal stocks have risen since the election — although still not as much as the market. Meanwhile, the decision to withdraw from the Paris climate accord has not stopped clean energy stocks from rising much faster.
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