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After the Trump trade, markets bet on inaction

William Henry Harrison, who became US president in 1841, grew ill and died a month into his term of office, leaving no policy legacy whatsoever.

It would be exaggerating slightly to say that Donald Trump’s first six months in office have achieved as little. But with this week’s collapse of the congressional attempt to replace Barack Obama’s healthcare system, none of Mr Trump’s priorities on domestic policy — healthcare, tax reform, infrastructure — has made substantive progress. This does not appear set to change soon.

It is therefore no surprise that the Trump trade, which saw a surge in the dollar, bond yields and equity prices following November’s election, has largely stalled or reversed. The prospect of a big fiscal stimulus from tax cuts and a government splurge in capital investment was perhaps the most obvious justification for the market movements. It has been punted off into the indefinite future.

This is by no means a disaster for the US economy, which has continued a sustained if occasionally variable recovery. But it does mean that, as far as policymaking is concerned, investors’ default position is that there will be nothing particularly constructive nor especially devastating from the White House or Capitol Hill. Their attention has instead refocused on the Federal Reserve.

While the trade-weighted dollar is below its level at November’s election and bond yields have largely flatlined since the start of the year, stock prices have continued to rise — apparently the last part of the Trump trade to have some momentum. This is deceptive. Although US equity prices did surge relative to those in the rest of the world in the immediate aftermath of the election, global stock markets have since caught up.

US equities have been on a rising trend for several years, interrupted by intermittent concerns over Fed tightening and its effect on emerging economies. Fiscal or regulatory policymaking has had little effect. The election may have accelerated some of the gains of the past six or nine months. It did not alter the underlying tendency. With interest rates low and corporate profits relatively strong, the conditions for a buoyant market are in place. Valuations are high — but less so if you think that the low rate environment will persist for many years.

Is the US market, then, enjoying the third term of Barack Obama’s administration? Not quite, but policy deadlock between the White House and Capitol Hill — and within the congressional Republican caucus — and a cautious and independent Fed have meant that the election has made little difference to investors.

The only policy that might disturb this equilibrium in the near term is a protectionist trade measure that kicks off retaliation among trading partners and the threat of dislocation to international commerce — an intemperate renegotiation of the North American Free Trade Agreement, for example. So far Mr Trump’s trade policy has been bigger on threats than on action. Abandoning the nascent Trans-Pacific Partnership trade deal has been the most radical decision. But this moderation may have been forced on Mr Trump by political circumstance. It could change.

It would be something of an irony if the real Trump trade eventually delivered a fall in stocks and the dollar because of a self-destructive move that harmed global trade and investors’ confidence. Mr Trump has said many eccentric things about the economy but done little damage. Disappointed investors may prove to be harsh judges if he moves from rhetoric into action.