Breakingviews: Trump’s stock-market rally has no clothes

Published Mon, Jan 30 20174:25 PM EST

Breakingviews

Richard Beales

Investors need to get real about the Donald Trump rally. The S & P 500 Index is up 7 percent since the eve of his election as U.S. president, even after a Monday dip. The hope is that Trump's promises of cuts in taxes and red tape will unfold without a hitch, while those that would slow trade and immigration won't happen. The weekend's chaos shows otherwise. An executive order signed on Friday immediately restricted visitors, returning visa holders and even, to start with, legal permanent residents who are citizens of seven predominantly Muslim countries from entering the United States. Enforcement confusion, spontaneous protests at airports, legal challenges and more were the result. This suggests two problems for the optimistic investment view. First, Trump looks set to follow through on all his big campaign themes, not just those that are good for the corporate bottom line. Pulling out of trade deals and imposing tariffs on imports are core parts of his agenda. This will be bad for big multinational companies' businesses, and probably for the U.S. economy overall. Likewise, the business risks associated with immigration constraints are underlined by the alarmed response from companies like Google parent Alphabet. More from Breakingviews : Immigration ban hands U.S. firms dilemma The second problem is that, by design, accident or a bit of both, the implementation of Friday's order was a mess. News reports suggest that Trump and his non-expert confidants drafted it in isolation and secrecy and gave affected agencies little warning. Even tax cuts and the removal of regulations won't be so good for business if their enactment creates disarray. At a price-to-earnings ratio above 20, according to Thomson Reuters, the S & P 500 is highly valued. Yale economist Robert Shiller calculates a cyclically adjusted PE ratio, which currently stands at over 28 compared to a nearly 140-year average under 17. That looks priced for something like perfection, too. Trump's policies, though, are proving imperfect from a business perspective in both concept and execution. Ray Dalio, boss of giant hedge fund Bridgewater Associates, wrote in December about the possibility of Trump's tax and spending policies igniting "animal spirits" and creating a "virtuous cycle" of investment and returns. His caveat was to question "whether this administration will be a) aggressive and thoughtful or b) aggressive and reckless." Investors should be starting to get the answer. For more independent commentary and analysis from Reuters Breakingviews, visit breakingviews.com

Donald Trump

Nicholas Kamm | AFP | Getty Images

An executive order signed on Friday immediately restricted visitors, returning visa holders and even, to start with, legal permanent residents who are citizens of seven predominantly Muslim countries from entering the United States. Enforcement confusion, spontaneous protests at airports, legal challenges and more were the result.