Bob Homan: Corrected by the ‘invisible hand’
This column was originally written in Dutch. This is an English translation.
By Bob Homan, Head of ING Investment Office
President Donald Trump is striking out wildly. Only the discipline of the market seems likely to restore predictability and stability to US economic policy.
Economic developments strongly influence financial markets. That is why analysts, strategists and asset managers are always eagerly awaiting the latest figures. The interpretation of these figures differs per market regime: when the tide is economically weak, more employment is seen as good for stock markets. And when the economic tide is strong, it does not. At that moment, the fear of inflation and the associated higher interest rates outweigh the potential contribution of additional growth to corporate profits.
Until recently, the market seemed to be united on the subject of import tariffs. After all, the levying of new tariffs is bad for economic growth and increases inflation. When President Trump and his associates announced import tariffs, the stock markets reacted negatively. And when they were postponed, the markets rebounded. However, something has changed. Since last week, markets have no longer reacted positively to the release of import tariffs. The constant announcing and withdrawing of levies is making people extremely nervous, not only on Wall Street, but also in Main Street. Consumers are keeping a tight hold on their purse, while uncertain managers are postponing companies' investment plans.
This is exactly what we now see happening. The lower confidence figures in the United States are taking their toll. And the less rapidly growing economy is now seen as more decisive than lower inflation (due to declining investments and spending), instead of the other way around. Now that stock markets are significantly down due to this declining confidence, there will be a negative effect on prosperity: many Americans have shares and they feel considerably less wealthy. This effect then accelerates the decline in confidence, which is detrimental to economic growth.
I think Trump will have to realise that doing business as a government is different from doing business as a company. British Prime Minister Liz Truss experienced the discipline of the market in a single day two and a half years ago; now it takes a little longer. The ‘invisible hand’ can thus ensure that economic policy in the US becomes more predictable and consistent again. Together with all the analysts, strategists and managers, I look forward to it.