Trump Rally and the Binary Impact
The stock market is rallying post-Trump victory. The President-elect has vowed to deregulate the markets, boost U.S. manufacturing by lowering U.S. tax rates and bust global trade agreements, while borrowing more to spend on infrastructure projects. The resulting higher interest rates be damned. Will this euphoria carry over to the private market?
Deregulation and lower taxes, if enacted, are a strong argument in favor of higher valuations, not just for existing stocks but for potential IPOs. A major reason many companies have stayed private lately is that they fear their valuations will be reduced should they go public. Any deregulation is a positive, especially for small companies. Heavy regulations hurt small companies the most. Lower tax rates could also be a major plus. Most IPOs tend to be small and mid-cap companies that pay the full marginal rates, so lowering the corporate tax rates from 35% to 15%, as Trump is proposing, will have a positive impact on them.
There is a downside to strong, sustained public market rallies. The prolonged sense of “missing out on the gains” could dampen the key argument in favor of private investments, which is invest early in promising, illiquid companies and realize abnormal returns at the exit. Furthermore, a lot of money has been invested in the last few years to keep companies private to avoid the restrictive demands of the public markets. With the market starting to move, the favorable risk/reward balance of the public markets could get too attractive to ignore.
And then there is the issue of interest rates. All the initiatives that Trump is planning will raise interest rates, according to most economists. This will impact private funding, hurt smaller companies in general, and compress valuations. Higher rates will make it more difficult for private companies (venture capital) to borrow money and invest in startups. Access to cheap, easy money is one of the main reasons that so many companies have elected to stay private. To the extent the cheap money goes away, it removes a major source of funding and may force companies to go public.
The trump rally in essence could end up being a double- edged sword for both public and private markets. At this point it is not clear when and how the dust will settle, but until there is clarity both the public and private markets have reason to rejoice (in anticipation).