In my day job, I manage assets for high net-worth individuals and I make a point of getting out and visiting my clients as much as I can. Since the election in November, they have been asking me the same question, or some variation of: What does Trump mean for my investments?
Here are the most common questions, and my answers:
No. 1. How will Trump affect the economy and the stock market?
The president is but one part of the government, which accounts for less than a quarter of the economy, though obviously it has a huge impact on markets and the broader economy through foreign policy, regulations, tax policy and spending.
Yes, Donald Trump can and will affect the economy and the markets. But we should not put all of our focus on the marginal impact of the president while giving short shrift to more important things such as corporate revenue and earnings, the Federal Reserve, interest rates, inflation, Congressional spending, employment, retail sales, Supreme Court decisions and, of course, valuations.
Like all presidents, if he does good things it will be supportive of the markets; if he commits major errors — such as starting a trade war or gets the U.S. into a serious shooting war — it is detrimental.
No. 2. Why is the market rallying when some predicted stocks would fall if Trump were elected?
One explanation for the market’s post-election enthusiasm for Trump was based on expectations of tax reform, tax cuts, infrastructure spending and deregulation. However, that was a post-hoc narrative. The simple fact that markets in Germany, France and Japan rose more than in the U.S. since the election suggests that something else is at work. 1
My explanation is that the global recovery from the financial crisis continues apace, slowly repairing and rebuilding from that event. If you insist on singling out an explanation for why global markets are rising, look no further than the robust recovery in corporate earnings, especially in Europe.
No. 3. How can you say politics doesn’t matter to markets?
Let me be precise: Politics can and occasionally does matter to markets — just much less than many people assume.
Originally: Defining the Trump Investment Effect