Trading Under Trump
As the U.S. presidential election draws near, it is important to dissect the potential economic repercussions of the electoral outcomes. While our analysis remains apolitical, appreciating the economic dimensions of a presidential tenure is pivotal for astute investment decision-making. This article explores some of the historical market trends under former President Trump’s administration, providing insights into his economic influence.
Current Political Forecast:
With the election less than four months away, former President Donald Trump appears to lead numerous polls. The anticipation has heightened following a recent presidential debate and the assassination attempt on Trump on July 13. Analysts now estimate a 65% probability of a Trump victory and a 30% chance of a Republican sweep in both chambers of Congress. In politics, nothing is certain, but investors are poised to consider the ramifications of what a “Trump 2.0” administration could entail.
Source: Bankrate. Available at https://www.bankrate.com/investing/trump-trade/
The Trump Trade:
Trump’s economic philosophy, characterised by deregulation, tax cuts, and increased infrastructure spending, has led to what is commonly referred to as the ‘Trump Trade’. Although Trump has not fully disclosed his economic agenda, his prior commitments to deregulation and tax reductions hint at a continuation of these policies.
Former President Donald Trump has always emphasised the stock market as a measure of success, frequently highlighting record highs during his tenure. His presidency has notably influenced various market sectors, often leading to mixed outcomes for different industries. For instance, from his inauguration in January 2017 to the conclusion of his term in January 2021, the S&P 500 saw a 67% increase, while the Nasdaq, buoyed by tech stocks, surged by approximately 135%. In contrast, the agricultural sector experienced volatility due to trade tensions, though it still managed a 15% growth in the S&P Agriculture & Food index over the same period.
Market Reactions and Tax Cuts:
The market, inherently forward-looking, is already adjusting to the prospect of a second Trump term. During his first term, significant policies such as the Tax Cuts and Jobs Act of 2017, which slashed corporate taxes from 35% to 21%, buoyed market confidence. The individual tax cuts also led to increased investments, stock buybacks, and dividends, benefiting tech companies. The S&P 500 rose nearly 50% from Trump’s election until the beginning of the COVID-19 pandemic, driven by robust corporate earnings. If re-elected, Trump has hinted at further tax cuts, potentially lowering corporate taxes to 15%. While these cuts can elevate real interest rates, impacting equity prices, historical data suggests that they tend to positively affect the economy and equity markets by enhancing economic efficiency and margins while tempering inflation.
Historical Comparison:
Over the last 75 years, the S&P 500 (benchmark index) has finished higher through every presidential term except for Richard Nixon’s second term, which Gerald Ford completed for him, and under George W. Bush, who inherited the dot-com bust and faced the 9/11 terrorist attack.
With just over 100 days until the November election, the benchmark index under Joe Biden is indeed on track to finish higher than it was on his inauguration day. He took office as equities were recovering from the COVID-19 shock. The index also climbed with Donald Trump at the helm from January 2017 to January 2021, and he oversaw a sharp crash at the onset of the pandemic. Biden and Trump have both overseen a nearly identical 43% return in the S&P 500 through 885 trading days.
While Biden has presided over investors’ exuberance for Magnificent Seven stocks and artificial intelligence innovations, the technology sector fared better under Trump. The Nasdaq Composite saw roughly triple the returns under Trump compared to his successor three and a half years into the term.
Meanwhile, small-cap stocks also performed better under Trump. The Russell 2000 notched a 10 per cent gain under his presidency, above the two per cent seen during Biden’s tenure so far. That’s led some analysts to view the July small-cap rotation as one component of the Trump trade.
Global Markets and the Strong Dollar:
A potential Trump victory in 2024 could again influence bond markets, with possible higher deficit spending and inflation affecting interest rates. If Trump wins, some analysts believe it could mean that the Federal Reserve might hesitate to cut interest rates, given that potentially higher deficit spending might boost the U.S. economy and drive up inflation.
A second Trump term would likely bring a mix of positive and negative impacts on the equity market. Lower corporate taxes and deregulation are expected to boost equity prices, while steep tariffs could have adverse effects. The net result will largely depend on whether his radical tariff proposals are political blustering or something that will be followed through and become actual policy.
Another potential impact of the Trump Trade and expansive fiscal policies is strengthening the US dollar. During Trump’s first term, the U.S. dollar gained value against other major currencies due to expectations of higher interest rates and stronger economic growth. If Trump is re-elected, the dollar could continue to strengthen. A strong dollar can reduce the cost of imports but may also inflate prices and negatively impact foreign investments.
House view and conclusion:
Investors have adjusted their strategies accordingly in anticipation of a pro-business climate under Trump. Understanding the extent to which the ‘Trump Trade’ has been priced into the market becomes crucial. Market volatility is typical in the months preceding a presidential election, which can lead to significant fluctuations.
We continue to maintain a long-term perspective, focusing on fundamentals and corporate earnings, regardless of the election’s outcome. While political developments are significant, they should not dictate strategic portfolio adjustments. Instead, an ongoing assessment of market conditions and thoughtful portfolio management will ensure sustained growth and stability. For more insights, visit us at www.paritywm.com.
