January 23, 2017

Donald Trump becomes the single biggest global market influence

We determine how much something is worth by placing a price tag on it. And you can be sure that when vast amounts of money move in a particular direction... somewhere, somehow, a powerful person, or group of powerful people, have made an important decision about something.

I've been told by numerous Wall Street traders recently that hundreds of billions of dollars are now on the move. And that's just the stock market. If you include bond trading, you can take that figure up to a trillion dollars.

Donald Trump has become the single biggest market influencer of our time.

So how is he doing it? Will it continue in the weeks and months ahead? And what can ordinary folk do to hedge, or insure, themselves against this force?

Thatcher, Draghi and three Federal Reserve chairs

The list of market influencers is distinguished. To find a conservative politician as economically and politically polarising as Donald Trump, you have to go back to the 1980s in Britain with Margaret Thatcher.

However, even she ultimately failed to build a grass-roots investment revolution. Early on in her prime ministership she stated that she wanted a society where "owning shares is as common as having a car".

She managed to get around a quarter of the population invested, which is impressive, but that later dropped to a little over 10 per cent.

Like Mr Trump, she was also revolutionary in her Thatcherist politics and presided over a stock market boom, but the latter was more of a global phenomenon.

The president of the European Central Bank, Mario Draghi, is also powerful. He convinced an entire monetary union that he would do "whatever it takes" to hold the eurozone together.

That's impressive. But you see Mario Draghi's reign has been dominated by reactionary policies, rather than initiative.

He's a financial problem solver, rather than an engineer.

Then there's the three Federal Reserve chairs that were in office in the lead up to and during the financial crisis: Alan Greenspan, Ben Bernanke and Janet Yellen.

All have been able to move markets. Ben Bernanke infamously sparked the 'taper tantrum' - causing an enormous rush of funds out of stocks as traders feared the end of the easy money that had artificially propped up the market up until that point.

No one, though, has consistently moved markets with single tweets and half sentences like Donald Trump.

Trump track record of market moves

On the day he won the election, the stock market experienced one of its biggest swings in recent memory.

At first Donald Trump's election was considered bad news.

The ASX was down 2 per cent, the S&P futures - an overnight predictor of what Wall Street will do - was down 4.8 per cent, Japan's Nikkei had tumbled 5 per cent, and the Mexican peso had crashed against the greenback.

By the following day, markets had decided to bet on the successful implementation of his stimulus package.

That was partly because Donald Trump appeared more presidential and considered during his acceptance speech.

As of late last week, Wall Street's benchmark index, the S&P 500, was up 6 per cent since the election.

That's highly unusual during a presidential transition. It's also directly related to the incoming president himself. Various other press reports have also referenced the fact that US stocks rose on inauguration day.

That hasn't happened since JFK was sworn in.

Perhaps one of the most acute examples of Mr Trump's influence came with comments he directed towards the defence contractor, Lockheed Martin. It's not a small company.

It has a US market capitalisation of over $US75 billion.

In a tweet, President Trump made reference to the fact the company's costs were "out of control". The stock then slumped nearly 3 per cent.

He has moved the US dollar, the Australian dollar, the Mexican peso and bond markets with simple phrases - the most recent one being when he said the higher dollar was "killing US manufacturing".

That sent the greenback tumbling. It's extraordinary.

How does he do it?

Here's what you need to know about his method: Donald Trump is both unconventional and, in effect, a-political.

He's unconventional because he doesn't use established channels, and methods of communication, to deliver his thoughts on issues.

That means that President Trump has the ability to surprise. That in itself, coming from a position of such power, has enormous potential to move markets.

Crucially, Donald Trump is also non-partisan.

I have to be a little careful in saying that because of course he is now a leader of the Republican Party. He didn't, however, emerge from the Republican movement. Most leaders of nations are there by default.

They are leaders of political parties that have the ability to form government. Donald Trump doesn't fit into that category neatly.

He created his own popularity, and with that came a power base. He doesn't yet appear to be constrained by party allegiances - if anything his party has had to follow him.

So he has the power to make some things happen without the normal constraints.

He's an entirely different kind of political beast, or as one trader recently put it, is just completely belligerent. That gives him enormous market influence and power.

Will his power endure?

So the big question is, how long will Donald Trump's influence over the market remain with us? The answer is as long as he's in power.

The S&P 500's 6.2 per cent gain since the election is one of the best performances for the American stock market for any presidential transition period of the modern era.

Timothy Anderson is one of my Wall Street contacts. He said the market's now looking for "phase two" of the Trump rally.

Mr Anderson said the market loves Donald Trump's promises of tax cuts and government stimulus spending - and the business confidence it's generating.

Unfortunately, there has been absolutely no detail about his plans since they were announced.

I guess that helps to explain why the market hasn't been able crack the key 20,000 point level on the Dow Jones Industrial Average just yet.

If his plans come to fruition, the market will rise. If they fail, the market will fall.

In the meantime, markets will swing depending on how traders view the likelihood of either of those events happening. The market will largely determine those views based on what Trump says, and what he tweets.

Is there any Trump insurance?

James Rosenberg is a private client adviser with Baillieu Holst. That means wealthy people pay money for his advice on where to put their money.

He told me recently that, for the foreseeable future, he's advised his clients to put more money in cash.

You see you could ride the Trump stock market rally, if and when it eventually picks up again, but who's to say it will and, if it does, whether it won't come crashing down in an instant.

Trump's influence on the markets is extraordinary, and in some respects unprecedented, but there's one obvious flaw in its make-up - it hasn't yet proved sustainable.

That's arguably the most important characteristic of any kind of influence.

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