An Optimistic View of Markets' Relative Calm

The past few weeks have revealed a systematic unwinding of what had been called “the Trump trades.” After the U.S. presidential election in November, equity markets didn’t fall as many had expected. Instead, we saw higher interest rates, a stronger dollar and an upward ratchet in stock prices, in the market expectation that President Donald Trump might prove better for the economy than Hillary Clinton. Those effects on market prices are mostly gone now, but so far I, contrary to many of Trump’s critics, still expect relative calm to continue.

An initial question was how much of the Trump equity boost came from the expectations of a corporate tax cut, or perhaps hopes of deregulation, including for the financial sector. To that extent, higher stock prices might have been reflecting the expectations of a redistribution of income to corporations rather than hopes for economic growth. Now, with the efficacy of the Trump administration dwindling, and the potential corporate upside receding into the distance, we are learning that the market still sees the status quo as acceptable for equity valuations. Even though the VIX, one measure of market volatility, did spike last week, it is still well below its 2011-2012 levels, or for that matter early 2016.