No doubt about the main focus this week - Donald Trump is back in the White House and he’s determined to hit the ground running. Expect a flurry of executive orders to curb immigration, threaten the rest of the world with trade tariffs and deregulate sectors close to the hearts of the Maga faithful.
Trump 2.0
Donald Trump is only the second US President to have returned to the White House after a period out of power. Non-consecutive terms are almost unprecedented.
Having had four years in power, and another four to plot his return, there’s no doubt that the new President will be quick out of the blocks this week. Some measures require Congressional approval. Others, though, can be implemented by executive order. The President can do what he wants.
Trade tariffs fall in that camp, so everyone expects them to be central to a new era of ‘Art of the Deal’ arm-twisting. If Trump can use the threat of higher levies to force trading partners to do his bidding on migration or drug trafficking, even the future of Greenland or the Panama Canal, then he probably will.
Other moves this week are likely to focus on boosting key US industries like oil and gas. Trump has promised an era of US ‘energy dominance’. He will want to slash red tape, cut restrictions on energy production and reverse Biden era measures like emissions restrictions designed to boost electric vehicle adoption.
How will markets respond?
Markets have been volatile since the New Year as investors try to assess the economic and financial impact of Trump 2.0. Working out how much of the Red Wave has already been priced in is not simple, especially with the US stock market trading close to its all-time high.
Last week saw a pick-up in market sentiment after a couple of weeks when it looked like the post-election euphoria was fading. 61% of stocks are now above their 200-day moving average as the equal-weighted index - a better measure of the broader market than the tech stock dominated S&P 500 - has recovered its poise.
Much will depend on how the fourth quarter earnings season pans out. We’re only 10% of the way into the results round but so far so good, with more than 80% of companies reporting so far beating expectations by a decent margin. Double digit growth looks plausible this year, which it needs to be if valuations stagnate or even fall back a bit. Earnings need to pick up the baton.
Also important is what happens in the bond market. With inflation sticky and the jobs market still robust, there’s little incentive for the US Federal Reserve to cut rates much further than they already have. Shares will struggle to remain competitive if the return from safe government bonds rises much further.
