Equities Are on a Trump Surge, Why the US Dollar Might Win

Once investors got over the shock of a Donald Trump victory, it didn’t take them long to realize promises and pledges made in the run-up to the presidential election, if implemented, would translate into a significant stimulus to the U.S. economy.

Such levels of investment in infrastructure, if supported with Buy America and some level of protectionist support for domestic producers, further coupled with significant reductions in corporate and personal taxation, would add up to a rather inflationary repackage. Not surprisingly, last week all four of the main U.S. equity indexes closed at new record highs on Monday.

According to the Financial Times, The S&P 500, the Dow Jones Industrial Average, the NASDAQ Composite and the Russell 2000 closed up 0.8%, 0.5%, 0.9% and 0.5% respectively, breaching their respective records as investors remain optimistic about a U.S. economic stimulus package next year. In their wake, European, Japanese and Chinese indexes all rose as well.

Nor did it end with a one day high. As the week developed, the S&P 500 topped 2,200 and the Dow continued to climb breaking 19,000 for the first time ever.

As we have observed this week, the dollar has surged on the back of President-elect Trump’s November win as investors calculate how much money may come home to the U.S. thanks to a tax deal proposed in the run-up to the election for companies to repatriate foreign profits.

What Does This Mean for the US Economy?

But has it all gotten a little but ahead of itself? Not that we want to pour cold water on stronger U.S. growth, nobody would cheer louder than us, but betting the farm on a sudden turnaround when, in fact, it could be many months, maybe a year or more before this investment actually happens means current increases may be a bit premature.

Certainly, our money is on the U.S. for the next few years. If the new administration delivers on half its pledges it will be inflationary and expansive compared to anything that has come before. But a lot of water needs to flow under the bridge and laws pass Congress, where austerity hawks will have their say, before much can be put into action.

Metals and the Dollar

Meanwhile, both the dollar and commodities are on a tear. All metals have risen this month and some, such as copper, have risen by $1,000 in a little over a week.

The fundamentals may be looking up, but they aren’t transformed. China consumes half the world’s commodities, the U.S. barely 9%. A stronger growing, investment-heavy U.S. would be a boost for commodities but it wouldn’t be transformational like China’s trillion-dollar stimulus programs have been in the past.

Demand aside, we have a stronger dollar with a promise, as rates rise, of an even stronger dollar to come. You can have rising commodity prices and you can have a rising dollar, but you rarely, if ever, have both running concurrently for long.

A strong dollar is bearish, or at the very least suppressive of commodity prices. While there is much to be positive about, my money is more on the dollar than on commodities next year. They both have grounds for further rises, but there is less standing in the way of the dollar than of commodities.