Donald Trump’s conciliatory acceptance speech, which suggests that he can be a more statesmanlike President rather than the demagogue of the election campaign, has helped to reverse some of the initial sell-off in equities in the immediate aftermath of his shock triumph. The bottom line, however, is that he has repeatedly proven to be a volatile character with a very thin skin. In addition, neither Trump nor many of his inner circle have any experience in government. Those factors suggest to us that uncertainty and market volatility will remain elevated for months, if not years.
This is very much a step into the unknown because we simply can’t know what type of President Trump will be. Will he be the demagogue from the campaign trail, who threatened to lock up his political opponents, punish the media, build border walls and start a global trade war? Or is he capable of becoming a statesmanlike figure who leads in a more measured manner? His acceptance speech provided the first insight into what we might expect from President Trump and the market reaction suggests he passed with flying colours. Rather than criticise Hillary Clinton, he praised her, saying that she was owed “a major debt of gratitude for her service to our country.” He went on to say that “it is time for America to bind the wounds of division” and “it is time for us to come together as one united people.”
Beyond that we look to who he will appoint to head up his new administration. Even after a year on the campaign trail, Trump appears to have only a passing grasp of policy, so it is important that he appoints people with experience, George W. Bush was in the same position, but had the very experienced Dick Cheney to rely on. This is where Trump’s running mate, Indiana Governor Mike Pence, could prove to be pivotal.
With the Republicans holding the Senate and the House, there is now a greater chance that some, or all, of Trump’s fiscal plan will be enacted. But the tax cuts, which are worth around $6trn over the next decade, would be mostly unfunded, particularly if Trump also boosts infrastructure and defence spending. It is hard to believe that the Tea Party fiscal conservatives in Congress would be willing to blow out the budget deficit like that. It would put the Federal debt burden on course to exceed 100% of GDP within a few years.
On trade, his acceptance speech was conciliatory toward other nations too, pledging that “while we will always put America’s interests first, we will deal fairly with everyone” and “we will seek common ground, not hostility; partnership, not conflict.” Nonetheless, we expect Trump to start by labelling China a currency manipulator and to bring a number of perceived disputes to the WTO. Tariffs are possible further down the line, but won’t be the first option. He will also insist on renegotiating NAFTA, but it is hard to know what he hopes to achieve. His main criticism is that Mexico (and Canada for that matter) has a VAT, which he has characterised as a one-way de facto tariff. That is economic gobbledygook. It’s possible that some modest concessions from Mexico might allow him to claim a victory. TPP and TIPP are dead.
Given the magnitude of the sell-off in equity markets in the immediate aftermath of Trump’s victory, we had originally said that the Fed’s December rate hike was off the table. But we may have jumped the gun on that one. We also thought that Fed Chair Janet Yellen might resign. After all, a clear majority of Americans apparently agreed with his criticism of her. If Trump remains in “statesman” mode, however, Yellen could remain as Chair until her term ends in February 2018.
It’s possible that a period of calm will quickly return to markets, echoing what happened in the aftermath of the Brexit vote. We don’t intend to change our US GDP growth forecast just yet, particularly with the possibility of interest rates remaining lower for longer. But the one thing we do know is that Trump is a volatile character and so even if a sense of calm returns before long, there will be the constant risk of a renewed blow-up over the coming months and years.