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Trump Inaugural Speech Ignites Fear of Trade War

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Up until a week ago, U.S. stocks were rallying fairly steadily on growing sentiment that a Trump presidency and all-Republican Congress would boost growth and corporate earnings.

Their plans to cut corporate and personal income taxes, increase spending on infrastructure and reduce regulations were seen as accelerating growth, along with inflation, which pushed up bond yields. By Inauguration Day the stock market was up 8% since the election, though off its highs, and the 10-year Treasury note was yielding 2.46%, up 60 basis points.

Then President Donald Trump gave a brief inaugural speech, and financial markets listened for what the new president actually planned to do.

“We will follow two simple rules: Buy American and hire American,” said Trump. “Every decision on trade, on taxes, on immigration, on foreign affairs will be made to benefit American workers and American families.”

Stocks retreated slightly and bond yields held steady, but worries about potential trade wars started to resurface.

“He didn’t say the one thing the markets wanted to hear,” wrote Greg Valliere, chief global strategist at Horizon Investments and a long-time observer of the Washington arena. “The financial markets were hoping for a full-throated embrace of tax cuts and tax reform, but they didn’t hear it. It’s coming, later this year, but it may come later than the markets would prefer.” He added, “Prepare for protectionist trade measures, perhaps as early as tonight.”

Within a few hours, Trump was signing executive orders – first mostly procedural matters and items having to do with Cabinet appointees, then an order giving federal agencies the option to change, delay or waive provisions of the Affordable Care Act, beginning the repeal that he promised during the campaign. The new administration also eliminated almost all mentions of climate change from the White House website, and Trump’s Department of Housing and Urban Development (HUD) announced it had rescinded the 25 basis point cut in the annual mortgage insurance premium that the agency, under President Barack Obama, had announced just weeks before.

“We’re now in a holding pattern, waiting for details, waiting for the plans,” says Nick Colas, chief market strategist at Convergex, a global brokerage company, about the sentiment of financial markets based in New York.

“The next few weeks matter a lot … How much of Trump’s agenda can be put through – infrastructure, tax cuts and regulatory rollback. A lot has been promised … We just don’t know.”

That’s why the stock market stalled.

“Investors’ high hopes of the Trump administration’s ability to quickly ramp up U.S. growth and corporate profits may well have pushed the markets ahead of themselves,” says Matt Freund, co-chief investment officer at Calamos Investments.

The bond market, too, may have overreacted, according to Freund. “While rates may drift higher over the first few months of the year as inflation pressures build, we believe fears of protracted long-term rate jumps may be overdone.”

Freund wouldn’t be surprised “to see a pause or pullback” in stocks as investors continue to asses the new administration,” but he “opportunities in loans and CCC-rated high-yield bonds.”

“Watch the trade rhetoric,” advised David Lafferty, chief market strategist at Natixis. Trump can change U.S. trade policy “largely by himself through the Treasury Department,” said Lafferty. He’s watching to see if Treasury labels China a currency manipulator, which he likens to the canary in the coal mine, the first sign that the new White House might impose large tariffs on China.

“If you slap a 45% tariff on imports from China [as Trump has threatened], China will retaliate, and I defy you to show me a stock sector that’s going to do well. The economic relationship between the two largest economies of the world needs to stay on positive terms.” “Trade policy is a source of worry” for David Kotok, chief investment officer at Cumberland Advisors, too. “History is unkind to tariff and trade barriers when they are used in a policymaking form…. Remember it was Smoot-Hawley legislation that took a serious recession and turned it into a depression in the 1930s,” he wrote, referring to a law that imposed 20% tariffs on almost 20,000 imported goods.

Veteran investor Jim Rogers told MarketWatch that investors should “sell everything” if Trump starts a trade with with China, and strategists at Goldman Sachs, in their weekly “Kickstart” note, wrote that fund managers are “unsettled” following Trump’s inauguration. “Policy uncertainty was a topic of concern raised in everty client meeting.” 

Overall, market strategists and analysts see Trump’s plans to cut taxes, increase infrastructure spending and ease regulations as “pro-growth” policies that should boost earnings and inflation but also have a limited effect on the stock market because so much of that optimism has already been priced into stocks. “I’ve been neutral to mildly positive on equities because of valuations, but nothing is cheap,” says Lafferty.

In general, strategists have been most optimistic about financials, which could benefit from rising rates and less regulation; industrial stocks, beneficiaries of infrastructure spending; and tech stocks, which could capitalize on the repatriation of foreign assets at low tax rates and don’t appear to be as much in Trump’s crosshairs as once feared.  

Health care, however, faces “headline risk” due to plans to repeal the Affordable Care Act, and faces “too many unknowns,” says Lafferty.

But in the week through Inauguration Day, the SPDR Financial Select Sector ETF fell 2.5% compared to a 1.4% in the SPDR Health Care Select Sector ETF. The financial fund was down about 0.7% in Monday morning trading, while the health care fund was down about 0.4%.

The Dow Jones industrial average was down about 0.36% Monday morning.

“Things, of course, good get better and we certainly hope that strong returns continue,” writes Kotok. “But investors looking to keep the good times rolling should remember a key thing… Starting points matter.”

And Trump is starting his presidential term following more than seven straight years of economic growth and a bull market in stocks and 13 months after the Federal Reserve began to reverse its easy monetary policy and started raising rates.

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