For most observers, it's pretty obvious what the current bullish mood on Wall Street is based on. They claim the latest boom is all about hopes the new US president may provide fresh momentum to the domestic economy. There's a feeling that Donald Trump's first moves in office have met investors' expectations.
During the very first days as president, Trump has already displayed a policy that seems to be playing into the hands of entrepreneurs. He's breathed new life into two abandoned pipeline projects. He's also aiming to do away with many regulations in the energy and finance sectors. And what many Americans are particularly glad to hear - Trump intends to considerably lower income and corporate taxes.
And the winner is... Goldman Sachs!
Stock traders are also happy about Trump's staff policy. Goldman Sachs deputy chief Gary Cohn has become the president's top economic advisor, sending Goldman shares up by a staggering 30 percent. Lenders across the nation are hoping that Trump will free them from what they perceive as over-regulation in the finance sector. Trump's nominee to head the Treasury Department, Steven Mnuchin, has already announced he'll be looking into some of the measures taken after the 2008 global financial crisis with a view to scrapping them, if possible.
If it's true that the future is traded on the stock exchange, then US investors seem to believe in a very rosy future. They are willing to believe their president, who has pledged to not only lower taxes, but also ensure 4-percent annual GDP growth, create 25 million new jobs and simultaneously reduce public debt.
One should assume that investors have enough economic wisdom to know where to put their money. They should know tax reductions, investment programs and measures to reduce the debt burden do not really go hand in hand. In principle, financial market players have an inkling that Trump's plans may not be realistic at all.
What if the bubble bursts?
But so far, markets have chosen to ignore the likely impact of Trump's protectionist policies. After withdrawing from TPP and numerous warnings to carmakers to produce their vehicles in the US, the president is now also getting serious about erecting a Mexican border wall.
Donald Trump doesn't seem to realize that the US economy stands to suffer long-term from such measures, which will disrupt well-attuned cross-border supply chains. Some investors are beginning to nurture doubts already. The "Global Fund Manager Survey" says almost 30 percent of big US investors polled fear trade wars might break out as soon as this year.
Right now, stocks on Wall Street keep rising because of Trump, but soon people will realize they've been rising despite Trump. His investment program might be too much for a US economy already in good shape, leading to an overheating effect. A continued boom could lead to a sharp rise in consumer prices. Inflation would then have to be kept in check by higher benchmark interest rates, with a recession not ruled out in the final analysis.
Hence investors are well-advised to be cautious despite the current euphoria around them. Unlike in Germany, shares are a crucial part of people's old-age pension schemes in the US. Their provisions could be severely hit, should the Trump bubble burst one fine day. And it would be the middle class that would be affected the most - the very people the president has promised to support.
On the other hand, you cannot blame Donald Trump for everything. In the past five years of Barack Obama's tenure, the Dow Jones has soared from 12,000 to 18,500 points - at a time when nobody had real estate tycoon Donald Trump on their radar.
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