How the markets will react to Trump's inaugural speech

As the markets tentatively venture into 2017, there is the usual plethora of outlook commentaries, all basically saying the same thing they were saying towards the end of November 2016.

Hold your breath for more political posturing throughout 2017 as the egos come back from their seasonal holidays. The biggest immediate date in the investment calendar is Friday 20 January, when we will be rewarded with the inauguration speech of Donald Trump.

This will lead to one of three consequential conclusions from which to formulate an investment strategy. Up until that point, the markets are likely to remain in suspended animation, full of anticipation.

Three conclusions

The first of these is a good outcome, whereby Trump's desire to go down in history as a memorable president who gets on with things results in confirmation of his fiscal spending ambitions and a willingness to engage with his foreign policy in a positive way, whether that be with Russia or China.

His ego would no doubt relish having a warship named after him or even the greatest accolade of all, an appearance on a banknote. This will be market-friendly and is the Ronald Reagan comparison which the markets have significantly priced in.

The job of predicting what will be said at this inaugural speech is unlikely to have any takers as nobody but Trump knows

The second outcome is more along the lines of president Obama, where much was promised but little was achieved due to Congressional paralysis. With a Republican Capitol Hill, it is likely he will get his fiscal plans agreed but his more protectionist policies may come unstuck.

Again, the markets have probably priced this in, believing the worst of the protectionist pre-election rhetoric will either be watered down in his inauguration speech or will never see the light of day despite his best efforts.

The final outcome is a "what have we done" scenario. This is where we get confirmation of the worst fears of the Trump presidency: some trade policy ambitions likely to cause all sorts of friction with China, coupled with a green light to Putin to execute any expansionary ambitions he may have, without US objection.

The job of predicting what will be said at this inaugural speech is unlikely to have any takers as, in all truth, nobody but Trump knows, given that he shows no sign of listening to advisers or respecting historical protocol.

What we do know is that we will either heave a sigh of relief or kick ourselves that we didn't listen to the doomsayers.

Political events of 2017

If the outcome is market-sanguine, then the next date to focus on, again politically important, is the French presidential election on Sunday 23 April, followed by a likely two person run-off on Sunday 7 May.

The Socialist Party of Francois Hollande is yet to agree its nominee in the initial three-horse race against Fillon and Le Pen. In the middle of all this, just in case you were getting bored, we have the Dutch general election on Wednesday 15 March, which could well introduce more anti-EU instability.

However, we should not forget that 2016 endured a considerable amount of political turmoil with Brexit, Trump and the Italian referendum, and still the equity markets powered through it.

The US economy is the only shining light in an otherwise dimly lit world

The FTSE All Share Index returned 16.75% total return while the FTSE World Ex-UK returned 30.42% total return in sterling terms. By any measure, 2016 will be remembered as a good year for equity investors and another worthy example of equities climbing a wall of worry.

Some of this was due to the unique attraction of equity as an investment asset class relative to many other much less attractive alternatives. This could well continue into 2017 and possibly more so as bond market yield curves steepen.

Bond markets fared less well in the second half of the year as the US Federal Reserve Bank finally moved interest rates and indicated more than expected for 2017. This has become more believable after three years of tightening talk due to the inflationary planned fiscal spending and protectionist policies of Trump.

It has led to sizable capital losses at the long-end of the yield curve, and if inflationary pressures, especially in the UK, begin to build as oil prices rise, then yield curves could steepen further.

Such an outcome further supports investors' strategies to remain long of equities and short of bonds for now, but as with all investment positioning, it depends on the degree of movement.

Anything more significant on the need to tighten interest rates could trigger recessionary fears in what is an already extended expansionary economic cycle.

For now, the dynamics of the US economy are familiar to capitalist supporters, with a demonstrably positive and steepening yield curve, full employment and economic growth expected to strengthen.

It is the only economy in the world that is positioned in this way, with all other major economies either still deploying emergency interest rates, austerity policies to repay debt and ongoing quantitative easing, or suffering from modest to slowing economic growth.

Fingers crossed that Trump doesn't derail the US economy, as it is the only shining light in an otherwise dimly lit world.

Guy Stephens is technical investment director at Rowan Dartington.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.