Scandal, policy stagnation, political brinksmanship, and even the threat of nuclear war on the Korean Peninsula, have been the highlights of Donald Trump’s first year in power.
The US president has proved unable to keep the majority of his campaign promises, but that has not all been bad news for investors. While much lauded tax reforms and infrastructure spending pledged by Trump failed to materialise, the S&P 500 has powered on, rising 21% since the 2016 election and setting more than 50 new highs year to date.
The question is whether the big gains enjoyed in the first year of the Trump era happened in spite of him and whether they can continue?
‘In the year since Trump’s election victory, equity markets have reached almost unprecedented highs, but the question remains just how correlated, if at all, market performance is with the person in the Oval Office,’ said Kully Samra, UK managing director of Charles Schwab.
Jake Robbins, manager of the Premier Global Alpha Growth fund, believes they are not correlated at all, pointing out: ‘[While] Trump has consistently tried to take credit for the ongoing equity bull market, given the Republicans have not delivered any meaningful change in policy – having failed to repeal Obamacare, failed to increase infrastructure investment and seem doomed to fail to reform the US tax code – then there are probably other drivers of this market performance.’
He added: ‘Given that the largest sector in the US is technology, one that is currently growing at an explosive rate, then the bull market becomes easier to understand.’
Robbins points to the underlying strength of the US economy as the key driver of the S&P 500’s rise and says that the market can continue its run whether the current administration is able to push through policy or not.
The risks now are more of a policy misstep with the current economic cycle felt by many to be in its latter stages. The Federal Reserve has lifted interest rates twice this year, but with the mid-term elections looming in 2018, Trump is under pressure to push through at least one flagship policy – with tax cuts the most widely expected – which would effectively be a return to fiscal easing.
‘This might be a positive development from a business cycle perspective, as the US economy is operating at or above full capacity, with the unemployment rate at its lowest level since the tech bubble,’ said Witold Bahrke, senior macro strategist at Nordea Asset Management.
‘Firstly, this suggests fiscal stimulus is not exactly what the US economy needs at the current juncture. Secondly, it means significant fiscal stimulus is likely to lead to higher wage growth rather than more jobs, because there simply is a shortage of qualified hands available to work.’
Bahrke warns that such a move would likely squeeze corporate margins and could result in a ‘rolling over of the profit cycle’, forcing further Fed rate hikes.
While he has exposure to the so-called ‘repatriation trade’, even if companies are able to bring vast cash reserves held offshore back into America without punitive tax charges, it does not mean they will do so.
He also warns that it is more important to focus on what companies do with the cash if it is brought back onshore, rather than the process of being able to do so, adding that companies acting on Trump’s mere policy proposals, are short-termist.
‘A longer-term consequence of Trump’s limited policy success is the exposure of corporate short-termism. Many companies acted on Trump policy proposals – such as “the wall” – before it became clear whether these were viable at all,’ he said.
‘The willingness of management to change capital allocations revealed the dangers of allocating on political grounds – particularly as the capital cycle is much longer than the four-year presidential term. This short-termism reflects poorly on company management and suggests they may not be allocating sufficient consideration to the sustainability of their business models in the long term.’