Why are US investors looking so optimistic?

Nothing, it seems, can upset the upward march of the US stockmarket and the dollar. Immediately in the wake of the presidential election result few would have thought it likely, but the Dow Jones Index of US shares is now flirting with the 20,000 level for the first time, while the dollar is at its highest level in nearly 14 years.

Even the decision of the Federal Reserve Board – the US central bank – to push up interest rates, and signal expectations of three further increases in 2017, did not seem to hit stockmarket confidence.

Of course higher interest rates typically underpin a currency, by increasing the returns to those holding it. But a higher US dollar will make life harder for US exporters, and so its compatibility with a rising stockmarket remains open to question.

And remember president-elect Donald Trump, in turn, needs high growth to deliver on his campaign promises and any slowdown in exports will not be welcome.

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He has said that his planned tax cuts and spending plans will, in themselves, boost the economy. But aiming for a growth rate of 3.5 per cent plus, he will need the economy to be moving at a decent clip when he takes office.

Promised tax cuts

Remarkably, however, the markets do not seem to have factored in much by way of risk that Trump might not be able to succeed in implementing his promised tax cuts and spending increases, or that even if he does they may not work.

He must get his budget plans through Congress – admittedly negotiating with his own side, the Republicans – and it remains a guessing game what he will try to do and what campaign promises he will ditch. And what of his campaign threats to tear up trade deals and impose tariffs, which could hit international trade?

In short, investors seem to be pricing up all the upside and none of the potential downsides of a Trump presidency. Interestingly, the Fed’s tweak to its interest rate stance – by becoming more hawkish on 2017 – has only served to underline the view that the investment world has changed.

Perhaps it has. But with bond and equity prices in many markets at high levels – only US bond prices have fallen significantly – and the US dollar on the up, there are certainly a lot of vulnerabilities in the markets heading into 2017.