Trump Euphoria in the Financial Markets Is Over

The bosses of the six largest U.S. banks have sold millions of dollars worth of stock in their own institutions — a sign of growing nervousness. A central cause of the insecurity is President Donald Trump, who is not fulfilling the expectations linked to him. It is unclear whether an actual downturn in the stock markets will follow. On the other hand, at present, investors have hardly any alternatives to stocks.

It is now good practice for the leaders of large firms to invest part of their private fortune in the stock of the companies they work for. In so doing, leaders demonstrate their deep belief in the future success of the business, for which they are significantly responsible. If the bosses of six of the largest U.S. banks suddenly sell the stock of their own institutions, one should sit up and take notice.

The Financial Times reported on Monday that the managers of Bank of America, Wells Fargo, JP Morgan Chase, Goldman Sachs and Morgan Stanley had sold a total of over $9 million of their stock thus far in 2017. There is seldom such a vote of no confidence in one’s own company. Why are the managers cashing out? Do they believe the stock market will turn and that the years-long rally will come to an end?

The insecurity of participants in the financial markets is palpable at the present time. Worldwide, the graph lines showing the stock prices on the largest indices seem drawn by a shaky hand: In the past weeks, there were smaller setbacks, again and again, followed by a slight increase. Are these the harbingers of a downturn or a clear correction?

A central cause of the insecurity is President Trump. After his election, the markets went head over heels in anticipation; prices rose to record levels. But slowly, disillusionment is kicking in. Up to now, he has not made good on any of his grandiose promises. Above all, he has not delivered on his most important project concerning economic policy — lowering taxes. Instead, last week he even presented the prospect that in case of an emergency, he would chance a government shutdown — a standstill of the administration if Congress did not approve the funds for his border wall with Mexico. He has already demonstrated how unpredictable he can be in the conflict with North Korea. Many observers believe that Trump has become a burden on financial markets.

Yet much speaks against an imminent correction. One of the most important reasons is the behavior of the Federal Reserve. “The Trump rally is being converted into a kind of anti-Trump rally by the Federal Reserve,” believes Robert Halver, head of capital market research at Baader Bank. The fewer impulses for growth that come from Trump’s economic policies, the less the Fed will have to intervene with regulations because if the economy is not moving, there is no danger of high inflation or even heavy selling.

A further interest rate hike by the Fed that is so feared by participants in the financial markets becomes even less probable with this situation. Currently, the prime rate in the U.S. ranges from just 1 to 1.25 percent, which is historically very low. What basically applies is this: The lower the interest rates, the more attractive the stock.

The improbability of a larger correction is also due to a lack of alternatives: Where should the investors put their money if not in stock? Unlike before the financial crisis, fixed-interest securities are hardly yielding profits. This is a consequence of the soft-money policy and the related, historically low interest level. “Interest-bearing securities are no longer yielding, so investors must put their money in stocks,” says Folker Hellmeyer, chief analyst at the Bremer Landesbank.

In his estimation, worldwide expectations of growth also speak against a crash: “We are reckoning on the world economy growing strongly again; we’re assuming 3.6 percent,” according to Hellmeyer. He points to “stark valorization differences” in the international stock markets. The price-earnings ratio of European stocks stands at 13, those in the U.S. market at 19. That means that European stocks are cheaper than American stocks since the price-earning ratio places the stock price of a firm in relationship to its projected profit. “With this divergence, it is quite natural that investors are somewhat more conservative with U.S stocks,” states Hellmeyer.

The Old Rules Are No Longer Valid

Even the exchange rate provides for differing expectations in the U.S. and Europe. The euro is currently continuing its roll, and costs almost $1.20. Just six months ago, the rate was moving in the direction of parity — one dollar for one euro. That’s positive news for the U.S. “Because of the debasement of the dollar, U.S. firms can export more again. That strengthens the profit situation of U.S. firms and with it their stock prices,” says chief analyst Hellmeyer.

The bottom line according to many specialists is that investors do not need to fear an imminent crash. In the past, upward phases were over after seven or eight years, but the old rules are no longer valid. “In the past, issuing banks always halted a boom by raising interest rates. They wouldn’t risk that today. That would be aiding and abetting the murder of the economy,” says expert Halver. He reckons on the markets remaining in a stable sideways position for a long time yet. Accordingly, investors do not need to allow themselves to be infected by the nervousness of some bank bosses.