Bullish Investors Positive About President Trump’s Policies
Stock-market investors worldwide, especially the Bullish ones who have been proven right since 9 November have been richly rewarded, look to be in a gradual transition in their operating outlook.
Their environment is moving away from comfortable reliance on central banks that are able and willing to support asset prices and toward a White House less constrained by Congress in pursuing pro-growth policies, given the Republican majorities in both houses of Congress.
Last week 2 events attested to the speed of this transition.
For much of the frame since the Y 2008 global financial crisis, markets have been able to rely on central banks to repress financial volatility and boost asset prices not as an end in itself for policy makers, but as a conduit to higher growth and faster balance-sheet repair.
Over the last few weeks the Fed looks ready to resume gradually lifting its foot off neat Zero interest rates. Now, the market expectations assisted by solid economic data, has 3X’d the implied probability of a March Fed hike to almost 100% in just a few days, and it has caused not disruptions to the financial markets.
“The Fed is not the only systemically important central bank that may be in transition mode, particularly given the growing awareness of the potential costs and risks of remaining too loose for too long. For its part, the European Central Bank has come under increasing pressure to consider reducing its balance-sheet support for markets as a prelude to abandoning negative policy rates. Meanwhile, the governor of the Bank of Japan has publicly questioned the continued effectiveness of a pedal-to-the-metal approach to unconventional monetary policy,” said economist Mohamed El-Erian
This change has not been of major concern to markets because of what is not being referred to as the “Presidential Put” meaning that is, the markets’ willingness to embrace prospects for pro-growth policies under the new Trump administration. This is due to two factors: repeated comments by President Donald Trump signaling his intention to pursue the trifecta of pro-growth measures involving deregulation, infrastructure and tax reform; and the reduced threat of paralyzing political gridlock on Capitol Hill.
The Big Q facing stock markets is less about the nature of the regime shift and more about its timing and effectiveness.
The ECB policy meeting Thursday and Friday’s job report has some influence on the speed of this transition.
When it comes to effectiveness, markets have yet to internalize the multiple dimensions associated with the simple fact that this is a different type of “Put.”
On the positive side
Transitioning from over reliance on central banks to a broader policy response has the potential to generate higher and more inclusive growth, as well as strengthen the underpinnings of genuine financial stability. Both of these would help validate existing asset prices and even push them higher over time in a sustainable fashion.
On the negative side
The new policy construct is less autonomous when it comes to implementation. Unlike the Fed, which can pursue measures without congressional approval, the President needs congressional approval for a lot of what he has suggested for promoting growth. And such approval is subject to influences that go beyond the merit of the measures themselves.
The “central bank put” was extremely supportive of asset prices for several years.
For the “Presidential Put” to be similarly beneficial, good policy making by the Trump Administration and sound economic governance by Congress will Make it Happen!
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Have a terrific weekend