By Landon Thomas Jr.
Markets hate uncertainty. It is one of the oldest saws in finance. Yet even as a series of political scandals flare up in President Donald Trump’s nascent administration, raising questions about his ability to pursue an investor-friendly agenda of tax cuts, deregulation and fiscal spending, the stock market just roars ahead.
Over the past two weeks, with the president’s immigration policies and Russia ties dominating headlines, the benchmark Standard & Poor’s 500-stock index has been setting new highs regularly.
For the most part, the stumbles by the administration have not been related to promises that Trump made—and that investors embraced—to recharge an economy that most economists believe is growing at subpar levels.
Still, that investors have chosen to ignore the chaos in Washington highlights just how deep is the belief (others might consider it wishful thinking) that Trump, at his root, is a president who will deliver market-friendly policies.
“I fully get the euphoria—there has probably never been a more business-friendly president,” said Adrian Helfert, the head of global fixed income at Amundi Smith Breeden. “Lower taxes and less regulations are good for corporations and equity holders.”
Since Election Day, the S&P 500 index is up more than 9 percent, and with money continuing to pour into stocks from bond and money market funds, the bull market is showing few signs of letting up.
But as the markets climb and corporate borrowing rates remain historically low, Helfert worries that investors are taking too lightly the possible pitfalls of this high-risk, high-return Trump presidency.
“He is pulling out all the stops,” he said, “and I just don’t think that investors are being compensated for the downside risks.”
Helfert points to the VIX index, or Wall Street’s “fear gauge,” which measures the expectations investors have that markets will convulse sharply in the future. Since Trump became president, the index has been trading at very low levels, unperturbed by political histrionics.
Indeed, it has been a source of confusion and curiosity for many market analysts that the most volatile president in recent memory is now presiding over a market that has been largely free of volatility since mid-November.
Of course, it is also true that a market that goes up for a sustained period, without the wild swings that have characterized past run-ups, will not set off volatility alarm bells.
And in that regard, Trump’s political supporters on Wall Street say they are not surprised by the market’s willingness to charge ahead.
What is driving enthusiasm, some investors say, is not so much that Trump is pressing down on the gas pedal with promises to increase spending and cut taxes, but rather his desire to take his foot off the brake and remove investor and business restrictions. Trump has repeatedly said his top priorities include rolling back regulations put in place by former President Barack Obama to keep large banks and funds in check.
That Gary D. Cohn, the former Goldman Sachs president, has emerged as one of Trump’s closest and most influential advisers in this regard is also seen as sign that deregulation will remain at the core of Trump’s economic agenda.
And risk takers have not just taken heart in the administration’s pledge to dismantle the 2010 Dodd-Frank financial overhaul. Some smaller loosening of financial regulations has also provided encouragement.
The Commodity Futures Trading Commission, the main derivatives regulator, said it would not penalize institutions for violating new derivatives standards.
And a Dodd-Frank rule that required energy companies to disclose whether they made payments to foreign governments was recently voided by Congress.
These are by no means giant moves, but they send a powerful signal all the same to investors frustrated by Obama-era restraints.
Ed Yardeni, a stock market strategist, calculates that savings deposits and money market funds, the two safest and lowest return options for the risk-wary, doubled to nearly $9 trillion at the end of last month from $4.5 trillion in early 2009.
A lot of this caution was driven by the trauma of the financial crisis, of course, but it has been sustained in the years since by persistent worries (political and otherwise) that the markets will collapse again or the economy will tank. These anxieties have been reflected in persistent swings in the VIX index in recent years.
Now, a lot of this pent-up cash earning close to zero in terms of interest rates is looking for higher returns in the stock market—with pension funds in particular leading the way.
“The reality is that the real GDP of the economy has never been higher and that consumer spending per household is at an all-time high,” said Yardeni.
© 2017 The New York Times
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