Global trade would collapse amid a tariff war. The dollar would be in free-fall as investors fled the chaos. The stock market would tank as money was pulled out of the country. When Donald Trump was elected as President of the United States, there were lots of dire predictions about the impact it would have on the economy and the Dow Jones index.
And what happened? The ‘Trump Bump’ as it became known on Wall Street was one of the strongest for any President in a long time. In the year after his election, the S&P 500 rose by 21 per cent, which was the best return since George Bush Senior way back in 1988, and, as it happened the fourth best ever (the record, in case you happen to interested, is held by Roosevelt with a 30 per cent gain in 1932). His critics were proved very wrong, and anyone who bought into the market when he was elected did very well.
Right now, and in much the same way, the markets are also under-pricing a Boris Bounce. Sure, there are plenty of reasons to be sceptical about the UK’s new Prime Minister. He doesn’t have much of a majority or much of a plan either. Then again, there are also three reasons why the returns might be even more spectacular than under Trump:
First, just like the current occupant of the White House, the Johnson administration is not going to be nervous about spending money, and lots of it. The UK public finances were already in decent enough shape, so there’s room for more spending. But Trump showed that you can borrow wildly and the markets don’t seem to care, and Johnson looks set to do the same thing, with lots of infrastructure spending, lots more police and teachers, and tax cuts as well. You don’t exactly need to be John Maynard Keynes to work out that a big boost to spending, and lots of tax cuts will drive up demand. Maybe it will be bad in the long-term, and maybe it won’t. We’ll see. In the short term, however, the economy will be a lot stronger, and companies will be making a lot more money.
Next, one way or another our agonised departure from the EU looks likely to be settled. Maybe we’ll get a tweaked deal. Maybe we’ll have an election followed by no deal. Maybe Jo Swinson will lead a Lib Dem-Green-SNP Remain alliance to victory and we’ll revoke Article 50. It’s anyone’s guess right now. But one thing is for sure. It will be resolved, and the uncertainty will be ended.
Finally, the UK market has been seriously under-priced ever since the referendum. While asset prices have risen around the world in a global bull market, the FTSE-100 has gone nowhere. International investors understandably couldn’t be bothered with us, and no one wanted to put money into such a chaotic stock market. But once the fog starts to clear, and they take a look again, they are going to see that the UK is very, very cheap compared to the other major markets. They will start to look attractive.
The global markets don’t think much of the UK, or its new government right now. But that was true of Trump as well. In fact, the markets may well surprise everyone by rising strongly. And the Boris Bounce may soon become as familiar a phrase in the City as the Trump Bump became on Wall Street.