Next week Donald Trump will reach his 100th day as the US president, an event which will be marked by a flood of TV documentaries, newspaper analyses, and one of his hallmark speeches defending his record so far and outlining how he intends to recover lost ground. As he approaches his first historic landmark, Mr Trump’s approval rating has dropped below 40 per cent, the lowest for any US president in modern history, and many of his key policies are in tatters. He has even abandoned his accusation that China is a “currency manipulator”: actually the Chinese are now rather nice, helping him in his fight against North Korea, and its president Xi Jinping is his new best friend.
All of this – and more – poses a problem for US markets, which have boomed on the promised package of easier credit, major tax cuts and more infrastructure spend. There are growing signs that the “Trump Bump”, on which all the market indexes hit new all-time peaks this year, may be running into a pothole. On Monday, Steven Mnuchin, the former Goldman Sachs banker who is now his US Treasury secretary, admitted the administration’s “highly aggressive” and ambitious timetable for tax reforms will slip following setbacks in negotiations with Congress over health care.
This weekend, finance ministers and senior bankers from all over the world gather in Washington for the spring meeting of the IMF and World Bank, when the state of “Trumponomics” will be the main topic. Mr Mnuchin will be very much in evidence, no doubt arguing, as he did over the weekend, that he is still on track, if a little behind schedule, and the tax system will be reformed later in 2017. Unfortunately, analysts are already pointing to the huge holes that are appearing in his budget plans: failure to impose a “border adjusted” plan that would tax imports while exempting exports would leave a US$1 trillion hole in Republican tax plans over 10 years. And the loss of Obamacare reform could cost another $1tn.
The Trump bump in share prices since inauguration day has been based on surging confidence readings in the president’s ability to yield quick dividends for the US economy. All the confidence indicators, which have driven the Dow Jones Industrial Average above 21,000, supported Mr Trump’s optimism of surging consumer spending, booming industrial investment, major new job creation and an acceleration in economic growth.
Unfortunately, that is not what is being delivered and there a growing scepticism among economists that it ever will be. “US economic indicators have been throwing off mixed messages,” says Scott Anderson at Bank of the West. A survey of indicators compiled by Morgan Stanley last week shows a worrying gap between the rocketing sentiment and “hard” data, which is trailing in its wake. On Friday, the Atlanta Fed startled analysts with a forecast that GDP will slow to annualised growth of a measly 0.5 per cent in the first three months of the year. That followed the announcement of weak retail sales and poor official inflation figures, with the first month-on-month fall in the core consumer price index since 2010. Data for industrial production has not been good either. In March only 98,000 jobs were created, well down from February’s 235,000, and other indicators are pointing to an economic slowdown.
This is not the “beautiful” new economic era that was going to make America great again and which drove share valuations to levels that could only be sustained by a record earnings surge. We are now in the heart of the results season with Johnson & Johnson, Netflix, Bank of America and Goldman Sachs among the more than 50 companies on the S&P 500 reporting results this week. Analysts will be going through them in fine detail to watch for signs that they support the boom. The slightest caution in the statements will be not be good for share prices across the board.
The biggest factor of all is faith in Mr Trump himself and his ability to deliver what he promised. The markets believed him when he said corporate taxes would be halved and all sorts of protectionist measures would be introduced to defend US business. The rust-belt would boom again, the coal industry rejuvenated, and factories that had moved abroad would return. The sceptics mocked but industrial America believed and so did market analysts.
And now? In the absence of those tax cuts, it is difficult to see how future earnings and dividends can support today’s valuations. The Trump bump may well turn out to be just that: a bump.
Ivan Fallon is a former business editor of The Sunday Times and the author of Black Horse Ride: The Inside Story of Lloyds and the Financial Crisis.
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