Dr. Jekyll and Mr. Trump: How are markets reacting to Trump’s two faces?

Much ink has been spent trying to understand exactly how Trump’s election will affect markets. In the short term, investors seemed drawn to a pro-growth, business friendly climate. The S&P 500 enjoyed a meteoric 7.4% rise from November 8 to January 25. The DOW crested 20,000. It looked like happy days were here to stay.

However, that iron-clad law of gravity appears poised to bring markets back to reality. The intraday trading band had narrowed, suggesting that investors are losing exuberance in the market. This and other indicators cause Vanguard’s Chief Investment Officer TIm Buckley to call the recent market performance “a sugar high.” What goes up must come down, and it looks like markets may be headed that direction.

Is Trump behind the deflation as well as behind the rally? There’s reason to suspect that investors are seeing two different Trumps and responding accordingly. Trump on the campaign trail was a tax cutter, an infrastructure investor, and a deregulator. Now, however, Trump the protectionist has started to govern, and investors are beginning to have second thoughts.

Specifically, Trump’s comments about tariffs and devaluing the dollar have called to mind another famous president: Richard Nixon. Nixon’s economic policies led to a decade of stagnant economic growth and moderate inflation, frequently called “stagflation.” Trump also reminds investors of Nixon in foreign policy, where he appears to be adopting the “madman strategy” of irrational action to throw opponents off guard. Such a policy is not conducive to the stability required for international business to flourish.

Of course, the degree to which any President is capable of influencing economic numbers so quickly should be held in suspicion. Much of the growth in stocks over the past few months is also attributable to strong corporate earnings and rebounding jobs numbers. The contraction could be coincidental, a response to the slowing growth of corporate earnings and the fear that the current rate of growth is unsustainable.

In all likelihood, the recent changes in the market are a product of both presidential policy and macroeconomic events. Savvy investors need to keep an eye on both Wall Street and Washington to judge their moves. Both factors can profoundly alter the landscape of markets, and plenty of news should be coming from each direction in the coming months.

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