Market Watch: Trump unleashes the Wall St bull ... how long will it run?

Regardless of what President-elect Donald Trump plans to do with the economy, US markets were in celebration mode this week, surging to new records – and probably lifting local KiwiSaver accounts with them.

“One of the things that markets were hoping for was a clean victory one way or the other and they’ve got that,” said Pie Funds chief investment officer Mike Taylor.

Ironically, given his reputation for unpredictability, Trump’s resounding win caused Wall Street’s Volatility Index (VIX) to fall sharply, suggesting markets may be in for a period of relative calm.

“The VIX was running quite high in the lead-up to the election. That’s fallen dramatically, the uncertainty has been removed,” Taylor said.

“We know who’s in the White House and what the policies are. So I think there is a bit of a green light there for markets to run between now and year-end.”

Wall St rallied sharply in the first session after Trump’s win pushing the S&P500, Dow Jones and Nasdaq to record highs.

Bitcoin also hit a new high above US$75,000.

Beyond the strength of the win, there was expectation about Trump’s proposed corporate tax cuts – he is expected to extend existing cuts and potentially go further, cutting the rate to 15%

“I’ve seen some estimates showing that it could give 15% EPS [earnings per share] growth for the US market next year,” Taylor said.

There was also a big surge for some tech stocks – including Tesla which is expected to be in line for favourable policy moves given Trump’s close relationship with its founder Elon Musk.

Smaller domestic companies also had a strong lift on expectations Trump’s protectionist trade policies might give them an advantage. US banks also caught the rising tide.

On the flip side some companies hadn’t performed that well, notably renewable energy, Taylor said.

Tariffs and inflation

Bond yields also rose in the wake of the victory, although they had been rising for weeks as traders placed bets on the Trump win.

Trump’s extreme promises on tariffs – which have included a 60% tariff on imported Chinese goods and 10 to 20% on all other imported goods – are expected to be inflationary.

“If you put a tariff on a good that a consumer is buying, it just means that the cost of that good goes up,” Taylor said.

“So it’s going to be like GST. It’s a one-off, but there’ll be an immediate impact on the price of that good.

“You can’t just switch to not buying Chinese goods overnight. It’s something that they want to transition the US away from over multiple years. So I think, you know, it could be quite tough for the consumer.”

Trump has said he will offset the inflationary effect with income tax cuts.

“But there’s plenty of economists who’ve said that they’re just not going to generate the revenue from the tariffs to provide the tax cuts that he’s promised,” Taylor said.

“So I think we can say, take everything he says with a pinch of salt. Certainly, there will be some further tariffs. Immigration will be tighter. Inflation will run a little bit hotter. There will be some further tax cuts, but it’s likely to be moderated from some of the grandiose promises that he made on the campaign trail.”

Even though Trump and the Republicans look likely to have enough political power to push policy through, it was possible he would find some senior business leaders pushing back if he tried to go too far, Taylor said.

The biggest impact on New Zealand’s economy might relate to the damage tariffs do to China, Taylor said.

“I’ve seen estimates that it could impact Chinese GDP by as much as 2% if those 60% tariffs are enacted,” he said.

The Market Watch video show is produced in partnership with Pie Funds.

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist. He also presents and produces videos and podcasts and is the author of the best-selling book BBQ Economics. Liam joined the Herald in 2003.