Another week, another wave of soaring stock markets. This time, the rally was partly sparked by signs that US Federal Reserve officials such as Lael Brainard and Bill Dudley are ready to embrace interest rate rises.
But the bulls are also dancing because of Donald Trump: in his first speech to Congress on Tuesday night, the president persuaded many investors that he is not just “America First”, but becoming more pragmatic – and thus more likely to implement pro-business, pro-growth reforms.
Is this optimism justified? Not if you look at Congress. Mr Trump will need widespread Republican support if he wants to enact his promised tax reforms, cash repatriation or $1tn infrastructure spending plan. That seems unlikely to emerge anytime soon, given that Republicans are divided over fiscal policy and Congress (and the White House) distracted by healthcare reform.
“[On Tuesday] Congress got no guidance and few details to the long-established Trump agenda. All the heavy lifting remains to be done,” observes Larry Sabato, professor of politics at the University of Virginia. Or, as Lewis Alexander of Nomura Securities laments: “Getting major spending and tax initiatives through Congress may be more challenging than expected.”
But if you want to understand why so many investors and business leaders remain so optimistic, you need to appreciate a second crucial point: Congress is not the only game in town. On the contrary, my conversations with business leaders in recent days suggest that many chief executives are quietly banking on the White House being able to use other tools to unleash animal spirits – even without those pesky legislative bills.
What are these non-Congressional tools? Top of the list is the issue many chief executives care about as much (if not more) than tax reform: deregulation. Mr Trump has promised radical deregulation, and in some areas this will require congressional help. The White House cannot, say, repeal the Dodd-Frank financial reforms just by presidential tweet.
But what it can do is install regulators who stealthily change how rules are interpreted and implemented. This could have a dramatic impact. Look, for example, at how the Department of Labor this week announced a “ delay” in the introduction of a fiduciary rule that would have set strict new standards for investment advisers. Or consider what might happen to credit guidelines and stress tests if the White House puts pro-finance, anti-deregulation officials into the four Fed governor positions that will come vacant in the next couple of years, as men such as Dan Tarullo, a regulatory hawk, leave.
This stealthy change horrifies financial reformers. But it delights Wall Street. “I have not seen a White House like this before – it’s all about deregulation,” I recently heard one chief executive officer tell his counterparts, with wild excitement.
A second tool is infrastructure. Mr Trump cannot deliver a $1tn spending package without a bill. But his team could start eye-catching initiatives to unleash public-private partnerships to fund infrastructure, in the style of Canada or the UK. It can also “encourage” US financiers or non-American sovereign wealth funds to provide capital to support this.
That money could then be used to implement some of the Obama-era infrastructure projects that currently sit on the shelf. The White House could also launch some new crowd-pleasing projects too, such as a badly needed overhaul of the antiquated air traffic control system. This is a pet obsession of Mr Trump’s and Wall Street seems eager to help.
Third, Mr Trump could use his bully pulpit to persuade business to do some of his economic hard work by “voluntarily” creating more jobs. Companies ranging from Walmart to Boeing have already done this. More such announcements undoubtedly loom. And in the coming months there will probably be industry-wide moves to boost worker training, led by the likes of IBM; the word “apprenticeship” is becoming fashionable.
A cynic might scoff that this is mere optics. Perhaps. But if symbolism raises confidence, that can boost growth. Either way, the key point is if you want to buy into the current stock market rally, you need to believe that the White House has the power to pull policy rabbits out of the hat, even without Congress acting as a compliant magician’s assistant. That may well be a wildly naive bet. But many chief executives and investors want to believe in that magic; and sometimes conjuring works.
gillian.tett@ft.com
