(Bloomberg View) — The past few weeks have revealed a systematic unwinding of what had been called "the Trump trades." After the U.S. presidential election in November, equity markets didn't fall as many had expected. Instead, we saw higher interest rates, a stronger dollar and an upward ratchet in stock prices, in the market expectation that President Donald Trump might prove better for the economy than Hillary Clinton. Those effects on market prices are mostly gone now, but so far I, contrary to many of Trump's critics, still expect relative calm to continue.
An initial question was how much of the Trump equity boost came from the expectations of a corporate tax cut, or perhaps hopes of deregulation, including for the financial sector. To that extent, higher stock prices might have been reflecting the expectations of a redistribution of income to corporations rather than hopes for economic growth. Now, with the efficacy of the Trump administration dwindling, and the potential corporate upside receding into the distance, we are learning that the market still sees the status quo as acceptable for equity valuations. Even though the VIX, one measure of market volatility, did spike last week, it is still well below its 2011-2012 levels, or for that matter early 2016.
The point here is not that the market is always right. Rather, confronting market prices as powerful aggregators of information forces us to articulate whether we agree or disagree, and to address where the conventional wisdom might be wrong.
When observing the evolution of market prices in reaction to Trump, I am currently left with a mix of very optimistic and very pessimistic sentiments.
First, the European Union, and not the United States, really does remain the center of Western civilization. The underappreciated good news is that European growth rates are edging up, the euro as a currency appears to have a more secure future, and Brexit, though I view it as a major mistake for the United Kingdom, is not pulling apart the broader European project. The refugee crisis has stabilized, and right-wing populist parties are not taking over Europe. I see that (legitimate) concerns about the impact of Trump are distracting many people from these quite positive developments.
