In the run-up to the presidential elections, we were warned time and again the calamity a Trump presidency would be for markets. Experts argued that Donald Trump’s unpredictability, protectionist instincts, and unorthodox tax-and-spending proposals would depress business confidence and cause equity prices to crash. In reality investors, or more likely their algorithms, looked past the spectacle of “Donald Trump the media personality” and saw that he had the potential to be no more than a pro-business Republican in populist garb.
The Cassandras of 2016 biggest mistake was to overestimate the commitment of House Republicans to fiscal responsibility and to underestimate Congress’ ability to come to an agreement on tax reform. In the end, the Republican Party’s unifying commitment to lowering taxes on businesses and business owners paved the way for a massive corporate tax cut that justified the S&P 500 20% rise in 2017.
But these naysayers weren’t wrong about the president’s many flaws, and it’s looking increasingly as if his inexperience and intemperance are starting to wear on markets. Though he has succeeded in fattening the Corporate America’s bottom line, it has been done at great expense of the deficit and future U.S. fiscal flexibility to respond to a crisis. He has also slowed issuance of new regulations, but so far executives don’t appear particularly impressed by this effort.
Outside of lower corporate taxes and a lighter regulatory touch, the effects of which have already been priced in by markets, there are no significant policy changes one can reasonably imagine emanating from the Trump Administration in the near future that will boost economic growth. The president is enamored with tariffs, and has wide authority to enact them, but it’s difficult to see how higher taxes on imports will do anything but harm to stock valuations.
While good policy surprises are difficult to foresee, risks to stock markets and economy mount. Recent stock market heroes like Facebook, Amazon and Google are either being personally attacked by the president on Twitter or facing increasing global scrutiny as to the legitimacy of their core business models. Emerging technologies like autonomous driving that offer the hope of future productivity booms are encountering developmental road blocks. And worst of all, historically low unemployment rates in the U.S. are doing little to mitigate the greatest economic problem of our day: slow wage growth and widening inequality.
Global threats loom as well. The under-appreciated fuel for the 2017 stock market rally was a strengthening world economy, which grew more quickly last year than at any point since 2010. But even the typically optimistic World Bank calls this a “temporary upswing” that could be easily undone political instability in the European Union, a widening trade war, or economic instability in the emerging world. One possible flashpoint: China, which is doing little to tackle the mounting debt loads which have powered its growth since the financial crisis.
Analysts hope that Corporate America will come to the rescue this earnings season, announcing fat profits a new stock buybacks to drag the S&P 500 out of correction territory. And they may very well be right. But at some point there will be a crisis or negative shock to the economy, which the president’s understaffed Treasury Department and Federal Reserve will be looked upon to help manage, and during which the president will be a key decider of policy. It will be then that we’ll see just how much confidence the investor class that Trump’s populism is just an act.
Christopher Matthews is a writer who splits his time between New York City and Accra, Ghana, with an interest in the intersection of markets, the economy, and public policy. He previously held staff positions at Axios, Fortune Magazine, and Time Magazine, and has been published in Forbes and Debtwire.