The rally in US equities is not yet over, according to Charles Stanley chief investment officer John Redwood who said that the market has priced-in too much pessimism over president Donald Trump’s policies.
Macroeconomic conditions have been favourable for some US companies over the past few years, with low global growth and low interest rates boosting those with still able to increase their cashflow.
The US technology space has been a particular beneficiary of the low growth environment, with the FANG stocks (Facebook, Amazon.com, Netflix & Google) helping to push the S&P 500 to record highs.
Performance of index over 5yrs
Source: FE Analytics
“Most share markets have been doing pretty well and we are optimistic still. We think it is still a very good economic condition with monetary conditions around the world [beneficial] for equity investment,” Redwood said.
“When you look back, once we started to recover from the big western banking crash of 2008 we’ve had a series of years where the world has made modest progress and this is going to be another year of pretty good world growth by post-crash standards of around 3 per cent.
“America has done better than most of the rest in recent years but we don’t think it is over for America either because Trump inherited a pretty strong economy and a number of things Trump wants to do would make it better.”
However, what could help to boost the market further is if president Trump is able to push through some of his policies – something the market is not pricing in.
While Charles Stanley does not hold political views as a firm, they believe understanding politics is key in attempting to predict the market direction.
“We don’t approve or disapprove of Trump we have to work out what he might do or what he might be able to achieve now he is the president of the United States of America,” Redwood said.
“We think at the moment the markets have been assuming very little,” the former Conservative MP said.
“We saw the market get very excited at the end of last year and the beginning of this year and bid up quite well.
“We then had a sell-off towards the end of the first quarter this year when people said this man can’t get anything through.”
Indeed, towards the end of the first quarter president Trump had failed to push his new healthcare bill through – something which has since been provisionally passed – and his controversial travel ban had been blocked.
As such, the market slipped back a bit in March and April before ticking up again as he has had more success in the last month.
Performance of index since the US general election
Source: FE Analytics
“We conclude from that that people in the market did get very nervous,” he explained. “I think commentators were rightly saying that he was finding it difficult to get through his healthcare bill and that tax cuts have been delayed and that was all true.”
However, Redwood said president Trump will reflate the US economy “one way or another” which is his main goal, with a growth target of 4 per cent per year.
“He really does believe that an economy that is growing at 2.5 per cent should be growing at 4 per cent though I think his advisers think they might be able to get it to grow at 3 and a bit.
“What Trump wants to do is he wants to reflate in three ways,” Redwood said, infrastructure spending, regulation and taxation.
Starting with infrastructure, Redwood said the $1trn pledge he made to invest in infrastructure projects when running for president were “an aspiration”.
He said: “I think in due course he will have a bit of success with that but infrastructure projects always take time to develop because you have to work out the details of individual projects to get them through permits. 
“When Democrats aren’t being too political they actually agree with all that,” the CIO added, though he noted that much of this relies on finding funds from other areas.”
One such area is taxation, which Redwood said is the policy most likely to impress the market and will make the biggest splash in the media.
He said: “Some people think he won’t get any tax cuts through because the Democrats hate him and the gap in the Senate is quite narrow and if tax cuts are thought to increase the budget deficit then there are all sorts of blocking measures that they can bring to bear.
“But he’s got some good news - the speaker of the House of Representatives, Paul Ryan, is an extremely able and interesting politician who has made a career out of arguing that America has totally uncompetitive corporate taxes and fairly uncompetitive personal taxes at the higher end.”
Trump would like to reduce corporation tax down to 15 per cent, and while Ryan has suggested reducing it to 20 per cent, he is not averse to further cuts if the economics work, Redwood added.
“The truth is that Ryan is the more important player because he controls the majority in the House who will table the legislation,” he said.
“It will be fought bitterly by the Democrats who will present it as a major set of gifts to rich individuals and large corporations but as part of the deal they want to repatriate a couple of trillion dollars that are sitting offshore by US multinationals.”
This would help to pay for his infrastructure spending and should help to reflate the economy faster than the current pace if successful.
The final policy he wants to implement is looser regulations on banks which lead to more capital in the system leading to an increase in growth.
“What Trump is trying to do there, and the treasury has put out its first changes, is to make it easier for banks to lend money to what we hope will be good projects,” Redwood said.
“I think Trump the property developer felt the banks didn’t always appreciate just how good a project he had when he put proposals forward for financing and he feels that a lot of other entrepreneurs like him who are not yet as successful have similarly good projects.
“He will want to work with the regulators to try and have a more relaxed but not imprudent system of bank regulation to get more long-term loans out there into major projects and into company development.”
If these policies are implemented successfully Redwood said it could catch the market off-guard, particularly taxation, which he said is the most market-friendly policy.
“I think if the markets really believed they were going to get tax cuts by December anything like the scale Trump was talking about they would have pushed the market higher,” he said.