Thursday, December 15, 2016

Mr Trump and the US Stock Market

Ever since Donald Trump's election in early November, markets have clearly understood the impacts of its announced expansionary fiscal policy. Its intention to stimulate economic activity through a tax cuts and increase of expenses, will certainly raise the need for public sector financing. This, in turn, will induce an increase in bond sales, increasing long interest rates, a phenomenon already seen In the behavior of the yield curve. This movement, in turn, led to an appreciation of the dollar against other strong currencies, magnified by accommodative monetary policies in the Euro Zone, UK and Japan. It is important to mention that the Fed's action on the basic interest rate amplifies this trend.

The stock market is, however, still with a lot of uncertainty and where we have many questions. If there was great certainty at this time that the new Treasury Secretary's goal of doubling the current GDP growth rate would be achieved, the major stock indexes would have already risen more consistently. What are the factors that are triggering this question?

The basis of Trump's policy lies in the Keynesian belief that the government, through expansionist policies and its multipliers, manages to expand GDP unequivocally. This result, however, does not reproduce with such certainty if examined in the light of modern or stochastic macroeconomics, based on the hypothesis of rational expectations, where the expansionist effect will only happen if the government is able to "surprise" the agents.

In the US case, it is possible that such an effect occurs. This is so because the agents' information set is not as sharp as it is in other parts of the world, where people are more used to this type of policy. In Brazil, for example, which has just gone through an unsuccessful experience, recently the announcement of such an attempt would certainly cause disappointment and not euphoria.

Thus, although it is possible for a stock market to observe a boom in the US in the beginning of Trump government, in the medium term, if the announced "mix" is maintained and protectionist practices are adopted, the outlook is not encouraging.

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