The reason to expect a bounce is that uncertainty is bad for stock markets and as uncertainty diminishes shares should recover. We can partially quantify this. Nick Bloom, Scott Baker and Steven Davis have compiled an index of US policy uncertainty going back to January 1985. There’s a statistically significant correlation (of 0.27) between this index and the dividend yield on the S&P 500. This relationship implies that a one standard deviation rise in uncertainty should cut share prices by around nine per cent.
However, as Mr Trump’s policy agenda becomes clearer, uncertainty should fall, thus raising prices. As the old saying goes, “better the devil you know.”
And Mr Trump might not be the devil. Barclays’ Will Hobbs says: “little of President Trump’s campaign trail rhetoric will make it to actionable policy.” And Brian Davidson at Fathom Consulting believes we’re more likely to see “Trump lite” than “Donald Dark.” The old clichés about checks and balances and campaigning in poetry but governing in prose are clichés because they are true.
Shares might get a further support from monetary policy. Philip Shaw at Investec says “a December Fed hike is less likely” because the Fed would be loath to raise rates at a time of uncertainty.
So much for the good news. There are, however, reasons to worry.
One is that low interest rates won’t last long. Ian Kernohan at Royal London Asset Management says that in the longer run a looser fiscal policy, immigration controls and higher tariffs would all raise inflation and interest rates, which would be bad for bonds.
Also, it’s possible that long-term dividend growth might be lower - something that would justify permanently lower equity prices. Even if Mr Trump cannot implement his more flamboyant campaign rhetoric, tougher immigration controls and some kinds of trade barriers look likely. Both would hurt long-term growth. Mr Shaw says: “There is a tangible risk that a Trump Presidency could fuel anti-globalisation momentum and spark a wave of protectionist policies around the globe.” This, he says, “would almost certainly knock not just US, but world growth prospects.”
Yes, a weaker US dollar and easier fiscal policy might well boost growth. These, though, are short-term cyclical positives. The blows to growth from immigration controls and tariff barriers might be longer-lasting - sufficiently so perhaps to offset Mr Trump’s promised cuts in corporation tax.
This is not to say they’ll be catastrophic. Developed economies are resilient to policy shocks, and history tells us there’s little governments can do to greatly change long-run growth. Nevertheless, even 0.1 percentage point lower dividend growth should mean a 0.1 percentage point lower dividend yield – which would wipe four per cent off prices.
And the hit to dividends might be greater than this. It’s not just aggregate growth that investors must worry about but the distribution of that growth between wages and profits. This matters enormously because as Sydney Ludvigson, David Greenwald and Martin Lettau have shown, such shifts have historically been the major driver of long-run returns on equities.
Insofar as Mr Trump’s victory is an assertion of the power of Main Street against “elites”, it calls into question the shareholder-friendly policies investors have enjoyed since the 1980s.
This raises the question: will we see a shift in incomes away from profits towards wages? Here, the signals from Mr Trump have been ambiguous. On the one hand, his calls for corporate tax cuts augur well for investors. But his protectionism doesn’t. Mr Davidson warns that this would be “a disaster for capitalists the world over.”
But there might be something else. Uncertainty of the sort that can be quantified by Mr Bloom and colleagues is only part of the story. Mr Trump’s victory has increased uncertainty in two other ways, which might be longer-lasting.
For one thing, the simple fact that markets weren’t expecting a Trump win - just as they weren’t expecting Brexit - should remind investors that they know less about the future than they think. If this lesson is learned (which given the power and ubiquity of overconfidence it might not be) then risk premia should stay higher than they have been in the past.
Also, Mr Trump’s victory might change outsiders’ perceptions of the US. For decades, the US has enjoyed what Valery Giscard d’Estaing called “exorbitant privilege”: demand for US assets has been higher than the US’s large overseas debt and suspect economic fundamentals would warrant, which has allowed the country to borrow cheaply. In part, this has been because the US has been regarded as a low-ambiguity economy. Thanks in part to the country’s cultural hegemony, foreigners feel a familiarity with it which they don’t feel towards (say) Japan or Germany.
However, Mr Trump’s surprise victory has taught us that we perhaps know less about the US than we think: there’s much more to it than Hollywood and New York, some of which isn’t pretty: it is Beverly Hillbillies more than the West Wing. This poses the danger that the US will lose its exorbitant privilege, its safe haven status and ability to borrow cheaply. This won’t happen overnight, but over years. If Mr Trump’s victory is a watershed moment - and that is for now an if - it is perhaps one in this sense.
