Expectations high ahead of Trump’s address to Congress

Much to the surprise of many, Mr Donald Trump was elected the 45th President of the United States.

US markets have risen to unprecedented levels largely on the expectations that Mr Trump will cut taxes, pursue aggressive fiscal expansion and roll back regulations.

Yet, markets have conveniently glossed over the more negative aspects of his policy rhetoric, including protectionism and curbs on immigration.

Indeed, there is reason to be cautious, as the office of the US President wields tremendous influence on international economic and foreign policies.

Mr Trump, who has already pulled the US out of the Trans-Pacific Partnership, has branded China the “grand champion” of currency manipulation and is seeking to renegotiate the terms of the North American Free Trade Agreement.

Meanwhile, the market-friendly policies such as fiscal reforms and deregulation are more complex and need Congressional approval.

Mr Trump could very well front-load his anti-trade policies, creating more uncertainties, while market-friendly reforms and deregulation could come later.

This would threaten market stability, given that investors have been focussed on the positive aspects of his policies.

Aside from policy uncertainty, the market is likely to face a more hawkish Federal Reserve, as tighter labour market conditions and more-robust growth push inflation higher in the US.

Against these prevailing risks, it becomes critical for us to take stock of the recent market ascent.

The S&P 500 index has rallied more than 10 per cent since Mr Trump was elected, even while the 2017 consensus forward earnings expectation has been rather flat.

Expectations are clearly high for Mr Trump to deliver on tax reforms, fiscal spending and deregulation.

Indeed, the market is at risk of a substantial pull-back should Mr Trump disappoint on these fronts.

Ahead of a data-heavy week, including US durable goods orders and personal consumption expenditure deflator figures, all eyes will focus on Mr Trump’s address in a joint session of Congress tomorrow.

True to his reality-television-star roots, Mr Trump has kept markets in anticipation, keeping mum on the details of his fiscal and deregulation plans.

It remains unclear if he will offer these details in his address.

Will it be Trump the president or Trump the candidate who will address Congress tomorrow? We will soon find out.

ABOUT THE AUTHOR: Gregory Choy is head of Wealth Advisory, OCBC Bank.