A new era has begun; what seemed inconceivable only a year ago has happened: Donald Trump has actually moved into the White House. His first week in office could be telling for the next four (or eight?) years. Disputes around the inauguration turnout aside, will we get a flurry of activity or will it be the start of Trumponomics getting bogged down in Washington bureaucracy? Alongside markets, we will be paying close attention.
Markets have so far focused mainly on ‘Good Trump’: someone who evolves from the divisive Campaigner Trump to a more thoughtful President Trump, and who focuses on a large fiscal stimulus, broad deregulation and business-friendly tax cuts. With that in mind it’s no surprise that equities and bond yields are higher (better growth and higher inflation), small caps have outperformed (the domestic boost) and that investment banks have topped the performance lists (deregulation).
Over the past few weeks, however, these Trump Winners have lost momentum. After the initial excitement, the longer it takes to get validation that promises will become policies, investor enthusiasm can ebb. That’s why this week could be crucial.
There are two main ways this week could go. Trump could unleash a flurry of activity pushing ahead on some key parts of his agenda, from repealing Obamacare, to convincing Republicans of a replacement plan, comprehensive tax reform and infrastructure spending.
There have been some signs that suggest this is a realistic outcome. The relatively low key inauguration with only three official balls was meant to signal a workmanlike approach to government. Trump has a track record of quick starts with his transition starting at a faster pace than past incoming administrations and has promised an extremely packed legislative agenda.
On the other hand, it’s also possible that the loss of momentum in Trump Trades presages a week where it becomes clear Trump’s ambitious promises were more bluster than real policymaking skill. Differences between the President and his party could come to the fore as it gets down to making decisions. The lack of overlap of Trump’s views with those of many GOP lawmakers may prove too great to be overcome.
Why could this scenario play out? Centuries of precedent for one thing. Like Westminster, Washington D.C. bureaucracy has a pretty good track record of slowing down even the most activist politician. The drop in approval ratings also doesn’t help. Trump’s ability to ‘convince’ Republicans of his policies to a large degree depends on his popularity and the associated risk to getting re-elected for any Republican who doesn’t support his plans.
Which path will he choose when at the crossroads? Turn left and the Trump trade has another leg, turn right and get ready for the first round of disillusionment. In the latter case, the market debate could quickly turn from the benefits of ‘Good Trump’ to the risks of ‘Bad Trump’. One thing is for sure, it will be anything but boring.