• opinion
  • Updated 24 mins ago

Dow eclipses 20,000 as investors applaud Trump

US President Donald Trump has celebrated the Dow reaching the 20,000 milestone by tweeting "Great!"
US President Donald Trump has celebrated the Dow reaching the 20,000 milestone by tweeting "Great!" Bloomberg
by Karen Maley

"Great!" an exuberant US President Donald Trump tweeted overnight as surging confidence in the US economy helped push the Dow Jones Industrial Average above 20,000 for the first time.

Of course, as more cautious analysts noted, the Dow's 9 per cent rise since Trump's election victory last November means that the US share market is now extremely expensive, especially since the broader Standard & Poor's has also climbed to a record high.

The S&P; is now trading at 17.1 times expected earnings, the highest price-earnings ratio in more than a decade.

But investors are in no mood to heed their sombre warnings. They're betting that Trump's promises of massive tax cuts, reduced regulation and a big boost to infrastructure spending are set to make US shares great again.

And they've become emboldened as Trump's actions this week show that he has every intention of translating his rhetoric into reality.

Investors were cheered by Trump's decision this week to resuscitate two controversial pipeline projects – Keystone XL and Dakota Access – that were rejected by the Obama administration on environmental grounds.

And their excitement only increased when Trump fulfilled another of his campaign promises by signing an executive order for the erection of a "large physical barrier" along the US border with Mexico.

In a television interview, Trump said that US taxpayer funds will be used to construct the barrier - which is estimated to cost at least $US10 billion ($13.2 billion) - but that Mexico would ultimately foot the bill. Construction of the barrier would begin "in months".

Investors have also applauded signs that Trump's protectionism is much more than simply political rhetoric.

This week, Trump pulled the US out of the 12-nation Trans-Pacific Partnership trade pact, and signalled that he will follow through on plans to renegotiate the two-decade-old North American Free Trade Agreement.

Indeed, the worry that Trump really means what he said during the presidential campaign is clearly worrying Beijing.

The overseas edition of China's state-run People's Daily warned that both China and the US would be hurt by a trade war, and that the damage would spill over to other countries.

"If a trade war developed between the two countries, both China and the US would be negatively impacted," the newspaper said in a commentary.

"In the end, neither side would win, it would bring harm to other countries, and that harm would be brought to others without benefits to the US or China."

But US investors appear to be shrugging off the potential wounds to the US economy if Trump follows through with his threats against China, which include slapping hefty tariffs on Chinese imports.

They figure that while rising US protectionism would undoubtedly hurt the global economy, the effect on the United States would be minor.

Closed economy

That's because the US economy is a relatively closed economy, which relies heavily on domestic spending and the service sector. Indeed, exports of goods and services account for only 12 per cent of US gross domestic product.

At the same time, investors believe that Trump is a good negotiator and the US is in a strong bargaining position to derive a better deal with its major trading partners – Mexico and China – because it runs a large trade deficit with both countries.

Investors are also hopeful that any tariffs or trade restrictions that Trump introduces will shift sales to US companies, boosting US corporate profits and employment.

And his pressure on US companies – such as the big US car markets – to bring production and jobs back to the United States is likely to boost capital spending in the US.

But other analysts worry that investors are losing sight of the huge role that trade agreements play in cementing geopolitical ties.

They point out that the the Smoot-Hawley Tariff Act – which increased nearly 900 US import duties in 1930, just as the world was tumbling into depression – created the greatest damage by souring US trade relations with other countries, and triggering a collapse in global trade.

They worry that while the US economy could emerge relatively unscathed from rising protectionism, it will stoke rising anger abroad leading to a fresh plunge in global trade volumes.