The concept of ‘Trumponomics’ is relatively new in the financial realm, as it relates to the policies of America’s new President-elect Donald Trump. Like the man itself, Trumponomics is a fluid and changeable notion, and one that has fluctuated wildly during a tumultuous (and acrimonious) election campaign. Trump’s fundamental tax plan has been rewritten twice already, for example, while he has also advocated for both a strong and a weak dollar during the last 18 months.

At its heart though, Trumponomics includes a revolutionary set of economic plans that will aim to restructure and rebalance the U.S. economy. Trump has pledged to cut both personal and corporate tax breaks, for example, delivering huge breaks to large corporations and working class Americans simultaneously. He has also focused on the restructuring of U.S. trade deals, while his team also hope to introduce large, fiscal stimulus measures that prioritise defence.

In short, Trumponomics offers hope and a sense of anticipation to everyone, which partially explains why the real estate mogul pipped Hilary Clinton to the White House.

How has it Already Impacted on the Markets?

Not all promises are kept, however, and in this respect Trumponomics represent little more than the American equivalent of a party manifesto in British politics. These are often filled with fanciful promises and pledges that appeal to the masses, many of which are simply not delivered once the realities of governance begin to take hold.

The idea of Trumponomics has certainly had a short-term impact on the financial markets, however, particularly in terms of securities and interest rates. In terms of the former, we saw the yield on ten-year U.S. Treasury securities rise from a little more than 1.8% at the beginning of last week to 2.2%, while the price of bonds also tumbled across the globe. Bloomberg estimated that up to $1 trillion of value was lost during this time, as the markets reacted and investors attempted to pre-empt how Trumponomics would impact on monetary policy and fiscal regulations.

This is the key point here, as Trump’s bold and maverick pledges mark a definitive shift away from the classic economic policy that has governed the Western world since the Great Recession. During this time, governments have reduced their budget deficits and implemented programs of austerity, while also artificially supporting the economy with base interest rates and cheap money. Trumponomics eschews these established economic principles, instead favouring long-term stimulus measures that promote a healthy interest rate and (potentially) a stronger dollar.

So while some have compared the economic reaction to Trump’s win to that which followed the announcement of the Brexit vote in the UK (when the financial market temporarily revolted and the value of the pound plummeted to a 31-year low), there is a greater sense of permanence as Trumponomics begin to take hold. After all, the Federal Reserve is almost certain to hike interest rates during its December meeting, reports the Washington Post, whilst the UK may also be about to follow suit in the New Year.

While such a move is supported by improving data-sets and economic performance, there is little doubt that Trump’s robust and aggressive monetary policies are beginning to exert and influence.

What Will the Long-term Impact of Trumponomics Be for Investors and Businesses?

Of course, it is fair to say that Trump has inherited a strong and burgeoning economy, while he will also become the first incoming President to preside over a labour market at full employment since the early 1990’s. Such positive sentiment may be casting Trumponomics in a more favourable light as the President-elect’s inauguration edges closer, so it is important to consider how such policies will impact on investors, businesses and the economy as a whole over time.

The liquidity of the modern financial market means that investors will always find a way to profit, while the current generation of traders have a keener sense of determinism than ever before. They will have also been buoyed by the continued strength of the dollar (which has been aided by wider economic growth and the continued weakness of the pound), despite concerns that Trumponomics would drive a slightly less valuable currency.

USD/EUR chart reflecting the growth strength of the Dollar. Source: OANDA

Of course, investors also have the opportunity to look back at historical trends in the wake of an election, which despite the unusual nature of Trump’s appointment at least offers some insight into how the markets will shift in the near and longer term.

From a business perspective, large corporations (and even small and medium-sized businesses) have been buoyed by Trump’s pledge to slash corporate taxation rates. Currently fixed at the nominally high rate of 35%, Trump promised significant tax breaks to companies in order to drive business spending and higher levels of reinvestment back into the economy, explains CNN. There have been initial concerns about how easy it would be to gain the approval of Congress for such a plan, while recent reports have hinted that this may trigger subsequently higher tax levies for low-income families nationwide.

If Trumponomics is to deliver on it’s most fundamental promise, this is a hurdle that the new President must overcome quickly once he is in office.

Article by Taylor Wilman