The "Trump" effect on the US economy and markets?

Author: Georgi Angelov

В края на април Доналд Тръмп направи първите 100 дни като президент на САЩ. Още избирането му през ноември предизвика поляризирани реакции. Поддръжниците на Тръмп и неговият екип твърдяха, че новият президент радикално ще промени начина на работа във Вашингтон и ще ускори силно икономиката. Противниците му твърдяха, че той е опасен за страната и за света и ще съсипе всичко. Има ли ефект „Тръмп“ през първите месеци на неговото управление и какъв е той?

Investor expectations remain optimistic

When Trump was elected, the stock market initially fell, especially tech companies like Amazon and Tesla, as it was believed that Trump disliked Silicon Valley companies and would make their lives miserable. Many internet entrepreneurs openly spoke out against his candidacy for president, and Amazon owner Jeff Bezos also owns the Washington Post, a newspaper that has been highly critical of Trump, which the president dislikes.

However, the stock market quickly recovered and hit new highs– especially after the Federal Reserve raised interest rates twice (in December and March) and announced that, due to the strong economy, it expects several more hikes this year, which will continue in the coming years. Even tech stocks rose sharply, especially given their good results. Investors do not seem to believe that the US president can harm big tech companies – in fact, he even invited them to discuss policy and included them on advisory boards.

Scandals in the new administration are not negatively affecting the markets so far

In any case, stock market indices have continued to climb since Trump’s election, a trend that began in early 2009. Trump has failed to dampen the over-optimism of the markets, which have reached incredible heights, fueled by low interest rates and abundant financing. The president’s promises of tax reform have helped to reinforce this optimism, although the reform itself is not even ready yet and it is not at all clear whether it will be adopted by Congress and the Senate. Interestingly, even the constant scandals created by the new president’s administration have failed to negatively affect the stock market. At least for now.

In the real economy, the results are not so impressive. In the first quarter of 2017, the economic growth rate fell to 0.2% for the quarter itself (compared to 0.5 and 0.9% for the previous two quarters). On an annual basis, the economic growth rate slowed to 1.9% and is lower than in the European Union (2%) – something that does not happen often. Trump himself promises to accelerate economic growth to much higher levels of 3–4%, although most analysts consider this goal unrealistic. It is difficult to draw conclusions based on one quarter, but so far the “Trump effect” has not yet manifested itself in the economy. At least such an effect is not noticeable at the macro level.

The dollar exchange rate has had an interesting trajectory – first it rose sharply, then it returned to the same level. After Trump was elected, the American currency rose and there was even talk of parity between the euro and the dollar – i.e. one dollar equaling one euro. Trump initially enjoyed the appreciation of the dollar, but then decided that he preferred a cheaper dollar to encourage exports. Gradually, the dollar began to depreciate and the euro to appreciate – with Macron’s election as president of France leading to great optimism for Europe and even greater appreciation. In reality, the dollar returned to the level it was at before Trump’s election – $1.11 per euro by mid-May 2017, exactly as it was at the end of October 2016.

The oil sector - the main beneficiary

However, there is one sector where things have changed dramatically since Trump was elected – it is the oil sector. Donald Trump promised to actively support the extractive industry, including oil, gas and coal. Already at the beginning of his term, several steps were taken in this direction, which showed that the administration was serious. At the same time, at the end of 2016, the oil cartel OPEC and Russia agreed to limit oil production in order to raise prices.

Since late 2016, US oil production has been rising sharply, reversing a sharp decline that began in 2015 due to low oil prices on world markets. Investment in the oil and gas sector literally skyrocketed in the first quarter of 2017, registering the highest growth in US history. Perhaps the oil sector is where the Trump effect is most noticeable so far – although OPEC has also made a significant contribution.

This article was originally published by Forbes Bulgaria on 30.08.2017.

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