Fears that equities will suffer a correction if US President Donald Trump’s proposed economic reforms aren’t delivered may be inflated, according to Principal.
Markets are currently harboring fears that stocks will “tank” if the proposed reforms that have driven the ‘Trump rally’ are either delayed or abandoned, Principal chief global economist Bob Baur said, however these fears may not yet eventuate.
“If that’s the case, with all the problems and partisanship in Washington now, why are stocks still holding at their highs? Markets that don’t go down on bad news are good markets,” Mr Baur said.
“Further, stock market peaks are usually associated with recessions and given the ebullient numbers and optimism, a US or global recession seems quite a way into the future.”
Mr Baur said that while there was “a reversal in some markets”, for the most part it’s too early for investors to consider this a stock market peak.
Additionally, Mr Baur noted that the improved economic data seen in markets around the world had resulted in an increased willingness to accept the US Federal Reserve’s (Fed) interest rate normalisation schedule than has been seen in the past.
“What changed? The economic backdrop, not the Fed. The Fed likely had in mind starting to normalise policy in 2015, only to see those plans undermined by a series of world economic problems,” Mr Baur said.
“The return of a bit of inflation, faster nominal growth, and rising world profits suggest that downside risks have receded. There are clear political risks in the United States, the United Kingdom, and Europe, but there has been enough improvement in US inflation and employment that the Fed is following through on its policy schedule.”
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