It feels like we’ve been here before. The stock market is booming, house prices are going up, and everybody is talking about how great the economy is. It’s all thanks to what part of the media are dubbing the “Trump effect” – this idea that now that the country has a pro-business president, it’ll see growth.
The problem for the market at the moment is that Trump has made a lot of promises, but very little of his and Steven Bannon’s agenda has been carried out. Healthcare is still up in the air, thanks to the failure of the GOP to pass a replacement. And none of the tax and regulatory reforms that will help business have yet come to pass. In fact, given that many of those reforms depend on the GOP united, it seems less and less likely with every passing day that Trump will be able to give American citizens and businesses the tax relief they need.
The upside to the Trump economic policies are staggering. Trump has said that he thinks, with his policies in place, that he can achieve more than 4 percent growth per year. That’s a lot of growth when you consider that average growth under the past administration was more like 1.5 percent. 4 percent growth hasn’t been seen since the Clinton era, and even then, much of that growth was tied up in unrealistic earnings forecasts of internet companies.
The downside for investors is that Trump may be forced to maintain the status quo for the remainder of his term, thanks to the vested interests in the Republican party who want to keep the economy in the state it is in. If the GOP shows as much movement on economic policy as it has on health policy, then the staggering current valuations for company assets in the stock market will fall. People’s expectations will be revised downwards, and we could again be looking at a situation where trillions of dollars of wealth are annihilated in an instant.
Many investment strategies have been discussed. But perhaps one of the best is a “wait-and-see” approach. Because decisions about the economy are so dependent on policy and not markets, it’s hard to accurately price anything. Trump might say that he wants to reduce taxation and regulations to boost employment, but whether he’ll be able to carry out that promise remains a mystery.
Trump has also said that he is not only interested in returning the economy to the state it was in during the Golden Age after the second world war, but that he is also interested in boosting technology. Trump knows that over the long term, the only thing that always delivers higher growth is better technology: being able to do more with less. His fundamental gamble is that he can grow America out of its economic problems, which is why cutting anything that might impede that growth is high up on his agenda.
Investors, in general, expect him to deliver, which is why the stock market has rallied. But if he falters during the summer, then we could be looking at a new crisis, all over again.