Trump and Wall Street

Print This Post A A A

For investors, the Trump presidency is starting to look fraught with danger. It’s one thing to annoy Democrats, even growing numbers of Republicans and all those liberals. But it’s not smart to annoy the big movers and shakers of Wall Street.

A little over half a year into his first term, Donald Trump now has managed to antagonise some of the world’s biggest investors like Bridgewater’s Ray Dalio, Mohamid El-Erian of Allianz and Goldman Sachs’ Lloyd Blankfein. They have publicly expressed concerns about the President’s less than helpful comments, which have affected investors’ confidence. So far this hasn’t translated into a negative stock market, but it has certainly cast a pall over medium to long-term market sentiment.

So, when that starts to affect the world’s largest hedge fund Bridgewater with about $A190 billion of funds), major investment house Goldman Sachs (about $A930 billion of investments) or Allianz’s massive bond fund run by PIMCO (over $A2 trillion), world markets should be on heightened alert.

Bridgewater has turned from optimistic early in the year to a more defensive stance. Dalio said it was reducing its risk because it was likely that the conflicts in Washington wouldn’t be handled well – and this would have a greater effect on the economy, markets and general well-being than classic monetary and fiscal policies.

Others like El-Erian, looking at the recent ruptures between Trump and business leaders. are getting nervous about an overstretched market and are taking out protection against any market turbulence. (Dalio, for instance, recently urged investors worried about global uncertainty, to buy gold.)

Earlier this year, confident investors were licking their lips at the prospect of cuts in the corporate tax rate from the current 35% to perhaps 22% to 25%, as part of a whole package of business-friendly reforms. Now, with dwindling support in Congress, these hopes have been lowered.

The push for tax reform won’t go away; indeed, it now may well be one of the few shots left in Trump’s locker.  But it will be that much harder to achieve because the President is rapidly antagonising his potential political friends in Congress. Donald Trump doesn’t seem to be aware of tactical nuances in the political game – even with his own, nominal Republican allies.

Apart from tax reform, Trump also faces battles over the budget, and the need to lift the debt ceiling to avoid a major default. These are crucial issues which, without careful handling, could spook the markets.

The big problem is that Trump appears not to appreciate (or even care about) the potential damage his actions could cause – and their large effect on business and investment confidence. In fact, boosts from tax cuts and the wall between the US and Mexico, which were positives a few months ago, now have almost become potential handicaps.

Not to mention the other big items on the Trump agenda, like major health care reforms and infrastructure investments. Add uneasy racial incidents in the US and global tensions with North Korea and there is an uncomfortable list of things that could go wrong.

Trump’s political supporters appear oblivious to these concerns, hoping their man can push through. Investors, however, don’t regard hope as a long-term alternative to sensible policies and practical political tactics – factors that seem to be lacking in the Trump strategy.

The President badly needs a victory to restore confidence in the medium-term, and as insurance against an unexpected macroeconomic or political setbacks. With stock market indices near peaks and interest rates likely to rise, there is limited slack in the markets to absorb bad news.

Investors need to hope that President Trump listens to his key staff, turns off his Twitter account and sticks to the script on his teleprompter.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

Also from this edition