Donald Trump’s first term
from a financial market perspective

Scarcely has there ever been a more controversial figure in US politics than Donald Trump. In a world already well on the way toward increasing polarization, widening wealth gaps, and social and environmental problems, Trump was the icing on a cake already in the making.

Although Trump wasn’t a Wall Street favorite coming into the election, markets would eventually welcome him wholeheartedly, focusing more on his increased government spending, tax cuts, easing of financial regulations and ultra-low interest rate stance than on various other more radical political highlights of his campaign.

From a market perspective, Trump’s first year in office was on point. Numerous positive influences –synchronized global economic growth, continued monetary policy stimulus in both the EU and Japan, expectations of fiscal easing in the US, modest inflation, unemployment at multi-year lows in many regions, rising corporate earnings growth – all came together to form a perfect mix. On the back of these factors, markets kept on climbing to strong double-digit returns with almost no volatility whatsoever: all through the year, indexes never corrected by more than 3% while managing to post no fewer than 62 new all-time highs.

Two meaningful events took place during Trump’s first year: in November 2017, Jerome Powell was nominated to succeed Janet Yellen at the helm of the Federal Reserve, arguably the most important market player; and in December that same year, the “Tax Cuts and Jobs Act” was signed into law. The new president also surprised investors with his near-constant barrage of volatility-inducing Twitter rants that shook markets in the short term, sometimes triggering intraday volatility as high as 10% (though any attempt to use his tweets as either directional or contrarian signals should be firmly discouraged).

However, the plain sailing of 2017 could not be sustained for long: shortly after Trump’s second year in office began, the Fed made three tightening moves, and doubts about the prevailing “reflation trade” mode on markets began to grow. Investors were shaken out of their complacency in February 2018 when their bets on low volatility backfired. Markets were able to weather two more rate hikes and the official start of the US/China trade dispute, reaching a new all-time high in September 2018. Then came a fourth Fed rate hike, and hitherto delayed investor reaction to the threat of an escalating trade war finally took its toll. (Has anyone noticed how ugly market events somehow tend to magically gravitate toward the fall season?)

Trump’s second year in office was tumultuous indeed, with all three major indexes ending 2018 in the red, making it the worst year since the Great Recession ten years earlier. Santa Claus (in the form of – who else? – the Fed) did, however, bring both the president and the markets a gift: a pivot from monetary tightening to accommodative monetary policy, providing a shot in the arm for what lay ahead in 2019. Meanwhile, Trump’s year-end signals (via Twitter, of course) that the trade dispute might subside also provided the bulls with some ammunition going forward.

Even the brightest and most knowledgeable of people could not have predicted that markets would prove so powerful and be able to bounce back so strongly in 2019. All year long, and particularly in the first and last quarters, markets kept on climbing the “wall of worry”, and nothing – not Trump’s constant tweets, nor fresh threats of trade tariffs on anyone and everyone, nor continuing Brexit worries, nor recessionary fears due to yield curve inversion – could hold them back.

Deciding more support was needed, Fed officials cut interest rates no fewer than three times as well as growing the Fed’s balance sheet in October 2019: the adage “Don’t fight the Fed” once again proved its merit.

This year has been about one thing only: COVID-19. It took nearly two months for markets to acknowledge that the virus would do anything but go away. Once they did, all hell broke loose in what ended up being nothing short of a bloodbath. But the ensuing comeback after the government stepped in with a gigantic monetary and fiscal stimulus package managed to even top the slide that had preceded it. The broader implications for the wider economy and the rapid technological changes this pandemic has triggered are yet to be fully manifested and understood. However, glimpses of these trends can be seen in the powerful move by the Nasdaq, which has far outpaced the S&P 500, the Dow Jones and the Russell 2000.

Given markets’ inherent unpredictability, no one knows what the next three months might bring (just remember the rollercoaster ride from end February to end May, which hardly anyone could have imagined possible and which brought low many institutional as well as private investors).

Should the coronavirus impact subside and at least some of the candidates currently undergoing Phase 3 vaccine testing manage to enter into large-scale production, Trump’s fourth year in office could well end with a bang, possibly even spilling over into 2021, when the economic recovery is expected to start gaining traction – similar to how his first year began.

On the other hand, if the opposing Democratic candidate Joe Biden is elected and follows up on his outspoken promises to unwind some of Trump’s corporate tax cuts and even raise the corporate tax rate, markets could find themselves facing another big obstacle in the near future.