In the last two months of the year, financial markets responded to the unanticipated election of Donald Trump in a textbook fashion — not only at the asset class level, with the major moves up in stocks and government yields, but also within asset classes as financials and the dollar surged.
In doing so, they were responding to prospects for higher growth, inflation and market inflows following the President-elect’s policy announcements on deregulation, tax reform and infrastructure. Even more impressive, this occurred in a remarkably-orderly fashion, with little evidence of distress among investors, many of whom were not set up for the sharp re-pricing of financial assets.
Trumponomics will remain an important market influence in 2017, with investors particularly interested in two things: the transition from announcements to detailed design and sustained implementation; and outcomes, particularly when it comes to the mix between higher growth and inflation. But when it comes to the evolution of the trifecta that influences most the wellbeing of investors — that is, returns, correlations and volatility — four other macro influences will also be in play.