One year of President Trump: the impact on markets
President Trump has credited himself for the rise in the stockmarket since he won the US election 12 months ago.
It is not fake news. Demand for equities has been strong because it is hoped the Trump administration will pass legislation reducing tax for companies, which should boost their profitability.
Since the election on 8 November 2016 US stocks have risen by 22.1%. The S&P 500’s most recent all-time high of 2,581.07 was set on 27 October 2017.
It’s not just US stocks that have been buoyed. Global stocks are up 21.2% in the past year, as measured by the MSCI World index, and at all-time highs too.
It should be noted that markets are in the midst of a bull run that is in its ninth year. The S&P 500 is up 281% since its March 2009 low, equating to average annual rise of around 18%.
Stocks have recovered from the global financial crisis and continue to benefit from loose central bank monetary policy and low interest rates.
Markets rose fastest immediately after the election with investors buying into the “Trump trade” – the hope of tax cuts and policies that would boost spending, such as on infrastructure, and create inflationary pressure, which can make equities more attractive.
Trumps pro-business proposals included:
- Lower corporate taxes
- A repatriation tax holiday - a tax break on overseas profits
- Massive infrastructure spending
- Financial deregulation
As a result of this rally, and company profits not rising fast enough to keep up, the stockmarket has become expensive.
The table below covers the most common ways to value equities.
- A P/E ratio compares share prices with earnings, with a lower number suggesting better value.
- CAPE or cyclically-adjusted price-to-earnings ratio, works similarly but is averaged over a decade to smooth out distortions of economic cycles.
- The dividend yield, the average income paid by S&P 500 companies, also offers some guidance to valuation
What has happened to bonds?
The prices for US government bonds, or Treasuries, have fallen sharply in the past year.
This is for similar reasons for the strong performance of shares – because of the anticipated inflationary spending from the Trump administration.
Inflation is bad for bonds, making the fixed income they pay today less attractive when income available elsewhere may be rising.
As the chart below shows, bond prices and yields have an inverse relationship. So, while bond prices have been falling (the dark blue line on the chart), down by 0.55% in the past year for 10-year Treasuries, the yield (the light blue line on the chart) has risen from 1.85% to 2.37%.
Another factor has been rising rates. The Federal Reserve has increased rates from 0.5% to 1.25% with markets anticipating further increases. This has a similar effect of driving down bond prices and pushing up yields.
How market sectors have performed
Trump has found it difficult to pass his pre-election proposals through Congress and into law, raising a question mark about the recent rally in stocks.
Stocks in the financial sector, such as banks and insurers, would benefit most from the proposed financial deregulation. They have risen 35.5% in the last 12 months.
Shares in the industrial sector, which includes construction firms, are up by 24.1%; the materials sector, which includes miners who produce raw materials used in construction, have risen by 26.4%.
Keith Wade, Schroders Chief Economist, said:
"Markets have performed well this year as a result of fading political risk in Europe and a goldilocks combination of robust growth and low inflation.
"The promise of lower taxes and deregulation have also played a role in the US although there are concerns that tax cuts might now add fuel to the fire and cause the US economy to overheat."
Please remember that past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall.
The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Registered Office at 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored.