Nouriel Roubini says markets are “overestimating” how many beneficial policies President Donald Trump can enact, and they're underestimating the potential damage he could do.
Roubini, CEO of Roubini Macro Associates, told CNBC at the China Development Forum on Saturday that positive emotions are dominating right now, but doom could be on the horizon, CNBC.
The U.S. stock market has been on a roll since the election of Donald Trump as president as investors bet on his plans to reform the tax code and cut regulation. The S&P 500 has risen about 11 percent since early November.
"[Markets] are overestimating the positives of the US-Trump policies. Infrastructure, stimulus, deregulation, tax cuts: I think Trump will achieve much less on those dimensions," he said.
"And they're underestimating the risk that the U.S. protectionist policies are going to lead to trade wars, that the restrictions on immigration are going to slow down labor supply, and that micromanaging the corporate sector is going to be negative," he said.
Roubini added that the policy mix for the U.S. also presents a challenge: Fiscal stimulus is going to force the Fed to tighten more, it's going to push up interest rates and the dollar, he said.
"In a way it's going to weaken the economy over time," he explained.
The rally has faltered in recent weeks as investors fret over the lack of clarity on his proposals to reform taxes and cut regulation.
"Over the next six to 12 months, maybe the positives are going to dominate because you have animal spirits, a build-up in consumer and business confidence, you'll have some policy action. The economy is growing and hopefully those positives are going to stay for a while," he said.
"But the more there's going to be trade friction, the more there will be restriction of migration, the more this stimulus is going to be excessive, forcing the Fed in a full-employment economy to tighten more and faster, the more some of these negatives start to effect markets and economic growth over time,"
Others agree that the Trump administration will eventually have to make solid advances for any sustained market rally to continue.
"Given the slow progress in implementing tax cuts and infrastructure spending plans, markets will soon realize that they are ahead of themselves," Hussein Sayed, chief market strategist at FXTM, told Reuters.
"I'm still quite confident that U.S. protectionist policies will do more harm than good."
Analysts have also said the Trump administration is spending too much of its political capital to pass a Republican-proposed healthcare bill, which may leave it wanting for support when it tries to reform the tax code.
"With tax reform and infrastructure spending getting pushed to the end of this year or even next year, it will eventually weigh on sentiment and business confidence," said Randy Frederick, vice president of trading and derivatives for Charles Schwab in Austin, Texas.
"Eventually, the market will lose patience," Frederick told Reuters.
(Newsmax wire services contributed to this report).
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