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Sporting success and six months of Trump

14 July 2017

Does sporting success have any impact on financial markets?

Many years ago my father said to me that an England victory in a Lords test match was worth two points on the index. Not much today but at that time it was just under one percent. At this time of year there is much talk of tennis and cricket in the air and I thought it was worth looking to see if my father’s words were true today. During the latest Lords test match against South Africa, from the first ball on Thursday to the market open on Monday after an England victory, the FTSE 100 was up about 1%. If you’re looking for a longer term impact I found that when England held the Ashes in 2005-2006, 2009-2013 and from 2015 to present the FTSE 100 index was up 15%, 42% and 18% (so far). When Australia held the Ashes between 2006 and 2008 and again in 2014-2015 the index fell 25% and 6% respectively. This may be an entirely spurious correlation or perhaps we should beware of this winter’s series in Australia!

Turning to Wimbledon, as I write two veterans Venus Williams and Roger Federer are still in the running for singles titles. The last time this happened was 2007 at the end of the recovery post the bursting of the tech bubble in 2000. The FTSE 100 index gave a total return of 7% that year. However the following year Williams won but Federer lost in an epic final to Nadal. As we know 2008 was a very different year and Wimbledon fortnight was followed by the culmination of the financial crisis and substantial falls in equity markets around the world. If Williams wins on Saturday, the superstitious will pray for a Federer win on Sunday!

After six months in office, President Trump is yet to make significant in-roads in his policy agenda. What effect is this having on the US economy?

On June 23rd Trump tweeted “I've helped pass and signed 38 Legislative Bills, mostly with no Democratic support, and gotten rid of massive amounts of regulations. Nice!”. As is often the case with his tweets, this was not entirely accurate. The White House later corrected him saying that the number was actually 39 not 38. However, the number of bills passed is not the real question, it is their importance and impact that counts. Many of the bills he has signed are relatively trivial, for instance he approved the naming of a federal building and court house after Fred D Thompson. He has signed numerous presidential orders but these have limited powers. The majority of his biggest headline actions have fallen flat. His immigration rules were overturned by the courts and his replacement for Obamacare has been stalled in the Senate. His credibility has been further undermined by the investigation into Russian interference in his presidential campaign and his subsequent firing of FBI director James Comey. The latest story about his son’s dealings with Russia do not help.

Healthcare reform was a headline grabbing story during the campaign and is one of the key savings that would make his tax reforms and infrastructure spending plans more feasible. Trump’s problem is that despite having a Republican majority, he does not have unqualified support from his own party. Many Republicans want a balanced budget which will continue to restrict what he can do. One piece of legislation that has passed is an extension of the budget ceiling until the end of September to avoid closing down public services. As we get closer to that date, this will become much more of a talking point. Trump also wants to push for deregulation of the financial sector but this is complex and progress will likely be slow at best.

When Trump was elected there was a so-called “Trump Trade” which caused a rotation out of growth stocks into the value sector. This was largely sector specific and saw banks, energy and materials stocks outperforming at the end of last year. Trump wanted to increase US oil production and signed executive orders to approve new pipelines. This coincided with OPEC production cuts that raised the price of oil adding further support. However, increased US production is countering the OPEC cuts and the oil price appears to have leveled out. The banks were up on talk of deregulation and the expectation of higher interest rates as Trump’s expansionist policies came through. Since then, progress has been slow and the relative outperformance has, to some extent, unwound in the first half of this year. More recently, the healthier state of banks has enabled the Federal Reserve to ease the rules on the distribution of capital to shareholders and higher interest rates will help banks profitability going forward.

Overall, Trump has not been bad for markets since taking office but has not been as good as many had hoped at the end of last year. What remains key is not what he says he wants to do, but what he can actually do.

 

 

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