For global stock markets, what comes after Trump-fuelled ‘sugar high’?

Economists and advisors have warned that the markets would soar with expectations because of Donald Trump's pro-business policies, but then fall because of their long-term side effects. The first part is coming true – but will the second?

American chief executives have come to believe that Donald Trump’s strong pro-business attitude will lead to a happy era of massive capital investment, less regulation and lower taxes. Evan Vucci / AP Photo
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The Dow Jones Industrial Average flirted with the 1,000 level in president Lyndon Johnson’s day, finally made it through in president Reagan’s reign, breached the 10,000 barrier under Bill Clinton and now hovers on the edge of 20,000 as the Barack Obama era ends.

In between there have been some massive swings – a record bull run between August 1982 and December 1999 drove share prices up by 1,300 per cent, but in the middle of it (the Black Monday of October 1987) the Dow fell a terrifying 508 points, or 22.6 per cent, in a single day.

The latest financial crisis, which began in the US when the house price bubble burst in February 2007, knocked prices back to a 12-year low, but a new bull run started in March 2009 during which share prices (as measured by the Dow) have more than doubled. Far from denting it, as was widely expected, Donald Trump’s election has fuelled Wall Street’s boom and anyone who sold on the awful prospect of what he might do has so far been confounded – as indeed they have been in Britain after the Brexit vote.

It has not been a good time for doom-mongers.

Since the low point in January last year, when pundits were forecasting financial Armageddon, the FTSE 100 has risen by 29 per cent, only ending a record of 14 consecutive daily increases on Monday; the S&P 500 is up 22 per cent and emerging markets are 25 per cent higher. Oil, which some forecasters reckoned would drop below US$20, has instead doubled.

So just a couple of days away from Mr Trump’s inauguration, and with the issues around Brexit getting thornier by the day, we have the Wall Street and London markets setting new records for reasons that no one can quite explain, and like so much else this past year, that not many had forecast. Mr Trump himself is a kind of unguided missile, with no one – possibly even himself – having a clue whether or not he means those wild things he says in his tweets.

Before he was elected, big business thought he would be good for them and the American economy, or at least better than Hillary Clinton. And theoretically he is. This week the IMF lifted its forecast for US economic growth for this year and next year to 2.3 per cent and 2.5 per cent, respectively, an increase of half a percentage point. American chief executives have come to believe that Mr Trump’s strong pro-business attitude will lead to a happy era of massive capital investment, less regulation and lower taxes.

Yet last week Mr Trump took aim at the US drugs companies, probably the country’s most successful industry, accusing them of “getting away with murder” and warning that “we are going to save billions of dollars” by forcing them to cut their prices. It seems odd that he would attempt to revive the rust belt by imposing penal tariffs on imported steel, and a 35 per cent border tax on cars imported into the US market, in the same breath as he savages the pharmaceutical companies.

At the World Economic Forum in Davos, where Mr Trump, even though he wasn’t there, pervaded every discussion, the consensus view of economists (if that is not an oxymoron) was that his policies will result in the US and global growth actually exceeding IMF forecasts, but will ultimately be exceeded by damage wrought by protectionist wars and increased international tension. His stated opposition to Muslims entering the US and his argument, made on no visible evidence, that “the concept of climate change” was invented by the Chinese as part of a plot to wreck American industry, are anathema to every single delegate in the plush Alpine ski resort this week.

Larry Summers, a former economic adviser to Bill Clinton, solemnly warned that the current run of happy markets and favourable sentiment will be seen, with the benefit of hindsight, as “a sugar high”, and as Mr Trump fails to follow up on his rhetoric, a “cycle of growing disillusion, disappointment and disapproval will set in within a year”.

The term “sugar rush” seems to be the new fashionable phrase in economic jargon.

Yet the markets don’t agree and have marched on, well into territory which on any measure marks historical highs. American shares have never been so highly valued – or overvalued – and one day the bull run will come to an abrupt and probably bloody end. But who wants to take the risk of getting off now? It will be much more fun to go along for the ride, which could last for another year.

Ivan Fallon is a former business editor of The Sunday Times.

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