17 Nov 2017
One Year on from the Election of Donald Trump – What Has This Administration Meant for Markets?
- Despite a host of geopolitical and domestic events in the first year of the Trump administration, equity markets have reached almost unprecedented highs, with the S&P 500 up 20.4%.
- Since the election, investors may have shifted their focus from day-to-day Washington politics to the fundamentals of individual companies and underlying economic data: a strong dollar, corporate earnings, wage growth and employment numbers.
- There are some warning signs that the bull run may be in its final stages, but for now fundamentals are likely to continue to drive sentiment and keep returns buoyant into 2018.
Last week marked a year since Donald Trump was elected president of the United States, and in that time US equities have reached almost unprecedented highs. Much has been made of the so-called Trump Bump; however, the key question is how much of this positive sentiment can truly be attributed to the policy plans of the new administration.
A comparison of the S&P 500 in the first year of first term presidencies since 1932
To fully grasp just how successful the market has been under Trump, it is worth comparing the performance of US equities this year with that of the first years of other presidencies. Through to 31 October, the S&P 500 is up 20.4% since election day in 2016. This compares to an average return of +6.6% during the first year of the first term of presidencies since Franklin D Roosevelt in 1932.
In that time, Democratic presidents have witnessed average returns of +13.5% and Republican presidents of -0.4%, meaning market performance under the current Trump administration has significantly outperformed compared to the first administrations of most of his predecessors. The only other Presidents to have matched or beaten Trump’s performance are George H.W. Bush in 1988 (+23.7%), Lyndon Johnson in 1963 (+22.4%), John F Kennedy in 1960 (+24%) and Franklin D Roosevelt in 1932 (+23.8%).
The U.S. stocks continue to surge but will the bull market come to an end?
What has been surprising about the first year of the Trump administration is that the market has continued to perform so well, despite a host of geopolitical and domestic events. It seems investors may have ceased paying much attention to day-to-day Washington politics, and instead have shifted focus to the fundamentals of individual companies and economic data. This is important as investors who stick by their long-term investment strategy often see outperformance when compared to investors who react to short-term market changes.
Since the election, we have undoubtedly witnessed a surge in business, consumer and investor confidence. But besides this so called ‘soft data’, the underlying economic data is also encouraging: corporate earnings are solid, the dollar is strengthening, wages are rising and job numbers increasing. We also have a Federal Reserve bullish enough not only to begin raising interest rates but also to start unwinding its $4.5 trillion balance sheet – an unprecedented move and one which signals significant long-term confidence in the economy despite some factors, such as inflation, remaining below target.
Even the appointment of a new Chair of the Federal Reserve barely moved markets. Given his time already served on the Federal Reserve board, the appointment of Jerome Powell represents a degree of continuity from Janet Yellen in terms of maintaining the Fed’s interest rate and balance sheet policies.
Historically, economics and markets have had a larger impact on politics than the other way around. As much as politicians like to believe they are moving markets, often it is the reverse. The underlying US economic story is undoubtedly positive regardless of any political administration.
As we look to the future, the big question on many investors’ lips is when will the current bull market come to an end? Judging by historical precedent, the market is due for a correction. There are some warning signs that the bull run may be in its final stages – such as rising bond yields, international markets performing better, and cyclical sectors such as energy and materials, outperforming expectations – but whilst pullbacks are possible, there is little evidence to suggest recession is nigh.
Even if we do enter a traditional bear market, it will likely be unrelated to the current administration, unless political risk escalates, or tax reform doesn’t come to fruition. And, for now, fundamentals are likely to continue to drive sentiment and keep returns buoyant into 2018.
This material is issued by Charles Schwab, Hong Kong, Ltd. The information provided here is for general informational purposes only and has not been reviewed by the Securities and Futures Commission in Hong Kong.