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ian mcgugan

Ian McGugan

You may feel – with considerable justification – that Donald Trump is an erratic egoist intent on picking fights with major trading partners for political gain. The problem is that Trumpophobia doesn't amount to an investment strategy.

Stocks surged after his election. Could misgivings about the new President be blinding many of us to the fresh appeal of U.S. equities?

Philip Orlando, chief equity market strategist at Federated Global Investment Management Corp. in New York, believes so and offered his thoughts to an audience in Toronto this week. It was a crash course in Wall Street's rationale for the recent market gains.

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Mr. Orlando argued the new President's biggest benefit will be reversing the toxic legacy of Barack Obama. "Probably the most damaging thing to the business community was the dampening of animal spirits and risk taking … the idea that bankers were fat cats, the perp walk and all that," Mr. Orlando told us. "Collectively, this didn't help economic growth."

Enter the saviour. "I think ultimately what Trump is trying to do is to reform the economy to increase productivity," he said.

Ronald Reagan was able to goose the economy by cutting taxes and shredding regulations, Mr. Orlando averred. Mr. Trump will use the same levers to boost the current economy's puny growth rates, he promised.

Don't underestimate the new President, he added. "The media hates this guy and will try to make him sound like a stark, raving lunatic who is going to blow up every trading relationship this country has. But I don't think that's what he's doing."

No, apparently Mr. Trump is simply using bluster as a way to extract better deals. "He probably doesn't mean 90 per cent of what he says," Mr. Orlando declared.

That may seem like an odd endorsement of a global leader, but Mr. Orlando argued that people who want to take the U.S. President at his word are just part of the conspiracy against him.

For instance, the travel disruptions that accompanied Mr. Trump's immigration ban? Those were actually the result of a computer snafu at Delta Air Lines, Mr. Orlando insisted. Or the concerns that many of his appointees lack any government experience? That's really an advantage, because the platoon of billionaires in Mr. Trump's cabinet will bring a fresh, private-sector approach to problems.

Stocks have shot up because of this new style, Mr. Orlando asserted. "Very simply, it's the market looking at the fiscal policy implications of a transition from Obamanomics to Trumponomics with consolidated Republican control of Congress."

Maybe so. However, the market's new enthusiasm doesn't mean it's right.

An aging population and underwhelming productivity still pose challenges to economic growth. Trade friction and Mexican walls remain dangerous policies, despite the post-election surge of enthusiasm for U.S. stocks.

Remember that the S&P 500 also boomed after Herbert Hoover won the presidency in 1928. Sometimes Wall Street simply gets things wrong.

Much of the current bullishness rests on the assertion that Mr. Obama was a spectacularly bad president who stomped on the business community's natural zeal.

Really? The stock market more than doubled during the Obama years. He inherited an economy in deep recession and handed over one running at close to full employment.

The comparison between Mr. Trump and Mr. Reagan seems equally far-fetched.

Plunging interest rates over the first two years of the Reagan administration fuelled much of the advance in the U.S. stock market during the early 1980s. In contrast, the Federal Reserve now appears intent on raising interest rates.

The tinder for the Reagan-era stock boom was cheap stocks. Shares traded for a mere nine times earnings when Mr. Reagan took office. Today, they fetch a hefty 21 times.

So where can stocks go from here?

The U.S. economy is growing slowly but steadily, as it has been for a while. Tax cuts may deliver an upward jolt. But stock valuations seem frothy. Put it all together and modest, restrained gains seem most likely.

Oddly enough, Mr. Orlando seems to agree. For all his pro-Trump zeal, he's calling for the S&P 500, now at 2,297, to hit 2,350 this year and 2,500 next year – not exactly a rip-roaring advance.

Maybe the lesson here is that we can attach whatever lurid political tale we want to the market, but that it's numbers that ultimately matter. Right now, those numbers suggest we keep both our hopes and fears in check.

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