Last week I quoted some of the dire warnings of what would follow a Trump victory in the US elections: “The ‘Dump Trump’ forecast of fund managers, quoted in The Sunday Times, who expected “somewhere between 5 per cent and 10 per cent to be wiped off global stock markets amid fears of trade wars”. Markets were to be “plunged into turmoil”, trillions “knocked off stock market values,” analysts at Barclays said there would be “a violent flight” from stock markets, and Citigroup believed the S&P 500 would “plummet” by at least 5 per cent.
They were right – but only for about five minutes. Share prices did indeed plunge by about 5 per cent when it became clear Donald Trump was going to win, but then, at 3 am Eastern Time, the president-elect began his remarkably conciliatory victory speech – and it was all over. Shares soared, with the Dow Jones industrial average closing at a record high on Thursday, accompanied by surging Treasury yields, which had their steepest jump since 2013.
As always, there were some clever people with hair-trigger market reactions who saw it first. Carl Icahn, the legendary corporate raider, emerged from Trump’s victory party in the early hours to place a US$1 billion bet on US equities. By sun-up he had made another fortune. “The world was going nuts,” he said the next day. “It was going into panic for no reason.”
Yesterday traders returned to their desks to start a new week in reflective mood, determined to make sense of a victory which few of them expected. In the backrooms of all the big financial institutions, learned analysts wrote thousands of words over the weekend trying to explain what had happened, why, and what happens next.
The answer, I’m afraid to tell you, is that no one has a clue. As Jan Loeys and his global asset allocation team at JP Morgan, put it: “The easy first conclusion is that we know very little aside from there being a lot of uncertainty.” Joachim Fels, the managing director and global economic adviser at Pimco, warned, helpfully, that “markets are likely to oscillate between hope and fear”.
At Citigroup, those same global macro strategists who were forecasting a crash last week said they had made “big changes” to their macro asset allocation calls. “President Trump presents new risks, but also opportunities,” they wrote over the weekend. “We reverse our preference for [emerging markets] assets and also our preference for government bonds over equities.”
There is a lot more in that vein, often contradictory, but there were some sensible ones too. Reading through some of analyst reports over the weekend (as one does), I was struck by the views of Marc Chandler, the global head of currency strategy at Brown Brothers Harriman. He notes that the $1 trillion fiscal stimuli mooted by Mr Trump’s economic team is “larger than even [Bernie] Sanders advocated in the primaries”, and strengthens the bull case for the US dollar. Investors, he adds, are more confident of a Fed hike in interest rates next month. Such a policy mix, he says, “is the most constructive combination for a currency. The magnitudes may be different, but that was the Reagan-Volcker mix that fuelled the dollar rally of the early 1980s”. It also led to the US running a deficit of 6 per cent of GDP, but let’s not go there.
What has the analysts seriously baffled is Trump’s unpredictability. In less than a week, he seems to have gone back on half the promises he made in the election campaign, or indicated he didn’t mean them in the first place. As the Financial Times remarked today: “Both political analysts and financial investors are waiting to see which of the two Donald Trumps will prevail: the bombastic primary candidate, or a pragmatist who viewed his more extreme campaign positions as bargaining points”. Or, as the economist Roger Bootle wrote in his weekly column: “We simply don’t know what Mr Trump will do – or how good he will be.”
We do know a few things: he wants to reduce both personal and corporate taxes and reform the tax system. He also wants to spend more on defence and infrastructure which, unless he cuts back somewhere else, will push up the budget deficit as well as inflation. “If you were looking for historical precedents,” wrote The Sunday Times economics editor, David Smith, on Sunday, “Trump could be seen as a hybrid of Dwight D Eisenhower and Ronald Reagan, rebuilding America’s crumbling infrastructure and slashing taxes to boost the growth rate”.
To that you have add a touch of Herbert Hoover, whose protectionist policies exacerbated the Great Depression: Mr Trump wants to tear up existing trade deals, abort new ones and slap a 45 per cent tariff on Chinese imports. He also wants to build that “beautiful” wall with Mexico which Agustín Carstens, the central bank chief, would create a “hurricane” for his country.
But will any of them actually happen? Perhaps the most candid assessment comes from Megan Greene of Manulife: “Anyone who tells you they absolutely know what will happen under a Trump presidency is probably lying.”
Ivan Fallon is a former business editor of The Sunday Times
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