Trump’s market rollercoaster could end in recession

citywire-Donald Trump’s shock election as US president has shaken up the outlook for shares next year and could plunge the US into recession by 2019, Legal & General Investment Management (LGIM) has warned. Strategist Lars Kreckel said Trump’s election had introduced more risk into stock markets, with the outlook for shares now looking much more volatile. ‘Consensus was moderate upside [in equity markets in 2017] but now the risk in both directions has gone up materially,’ he said. trump recessionEquity markets [in 2017] are not going to be plus-5% over the year, it’s either going to be plus-15% or minus-15%, or both over the year.’ US earnings growth pre-election was slated to be 6% in 2016 but Kreckel’s forecasts bump this up to 8% based on Trump’s growth plan. Growth could reach 14% after Trump’s 10% corporation tax cut, which would take the rate to 25%, is factored in. However, Kreckel then factored in dollar appreciation of 10% that would reduce earnings growth back to 12% and higher corporate bond yields, which would bring it down to 10%. However, he warned this ‘short-term party’ for stock markets could come to an abrupt end, with US recession a possibility in 2019. LGIM economist Tim Drayson said Trump’s tax-cutting, free-spending plans at a time of low unemployment, risked the US economy overheating, causing the Federal Reserve to hike rates and prompt ‘a nasty downturn at the end of the decade’. Drayson said that Trump’s plans were ‘radical’ but it remained to be seen how much change he could get past Congress. However, LGIM is still factoring in $100 billion of corporate tax cuts and another $100 billion in individual tax cuts at a cost of $2 trillion over 10 years. ‘The bigger the boom, then the larger the bust will be in 2019,’ he said. Not only will Trump’s plan overheat the economy, Drayson said it would also push the debt to gross domestic product (GDP) ratio up to ‘catastrophic’ levels. ‘If the economy overheats then the Fed will raise interest rates to slow the economy and that is a recession risk for 2019…but it could be worse,’ he said. ‘The tax cuts and spending plan are unaffordable…if we get a full Trump plan then we get a catastrophic widening of the budget deficit. The Trump plan would mean an explosive rise in debt to GDP.’

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