Mr Market and the first 100 days of Mr Trump

It already feels like a long time ago. The first policy priority that Donald Trump articulated, immediately after winning the presidency, was fiscal stimulus in the form of infrastructure spending. The country would “rebuild our highways, bridges, tunnels, airports, schools, hospitals [and] put millions of people to work as we rebuild”. Global markets, which had wobbled when the results came in, rebounded.

Infrastructure, as it turns out, is unlikely to receive legislative attention this year or anytime soon. The president’s first legislative foray was replacing Obamacare. This should have unified his party, which controls both houses of congress. It failed badly. His second effort, on tax policy, has been presented only in outline. There was enough detail, however, to demonstrate that Mr Trump has no proposals for funding the tax cuts he favours, setting up a fight with Republican deficit hawks.

Nor is Mr Trump’s failure to do deals confined to Washington. The Mexican peso has returned to pre-election levels against the dollar. Tough talk with his neighbour has turned reasonable. Rhetorical gambits against China have given way to sheepish conventionality. If Mr Trump is a master dealmaker, he has given no indication of it in his first 100 days in office. “This is more work than my previous life,” he said this week. “I thought it would be easier.”

All this makes it hard to understand why the US equity market, which rose on the promise of a comprehensive pro-growth agenda, is flying high still.

Mr Trump is an outsider to Washington but a president has residual executive powers. He can push on open doors, as when Mr Trump guided a Supreme Court nominee beloved by Republican senators through a Republican senate. He can make life easier for energy companies and banks with executive orders and by withdrawing the harassment that characterised the Obama years. The question is how much he can achieve legislatively.

Selling some form of tax cut to the Republican party should not be impossible. This could open the way to further reforms. Still, the central forecast has to be that Mr Trump will continue to struggle mightily to build a durable legacy through lawmaking.

Why, then, is the S&P 500 index a 10th higher than on election night, and near all-time highs? It is important not to over-interpret a market move of a few months duration, but here is a hypothesis: Mr Trump’s struggles have stifled opportunities but also reduced risks. The proposed $1tn in infrastructure spending is unlikely to appear, but neither is Mr Trump’s demonstrably false view of trade economics likely to be translated into policy. More importantly still to the many equity investors obsessed with interest rates, Mr Trump may be unable to overheat the economy and force the Federal Reserve into rapid policy tightening. At the same time, the global economy is on a stronger footing than it was four months ago, and all the major central banks in the world, save America’s, continue to buy bonds at a furious pace, keeping rates low.

If this is right, investors are close to where they were before the election. They expect modest growth — perhaps a bit more now than previously — but are confident that rates will stay low, and confident that low rates will support historically high valuations. This last article of faith, rather than anything Mr Trump does, may pose the biggest risk. There is no law tying low bond yields to expensive stocks. And if stocks should rapidly revert to historically normal levels, it will have repercussions for both Mr Trump’s presidency and for the US economy.