By William Hobbs, head of investment strategy at Barclays’ wealth management unit in London
“The reason our stock market is so successful is because of me, I’ve always been great with money, I’ve always been great with jobs, that’s what I do. And I’ve done it well, I’ve done it really well, much better than people understand and they understand I’ve done well.” – President Trump, 2017
Since Election Day, the economy, both US and global, seems to have stepped up a notch amidst reviving animal spirits. Millions more jobs have been created and, as President Trump was proud to highlight in this week’s state of the Union speech, the US stock market has added trillions of dollars of additional wealth to the lucky owners. The post election surge in the stock market is even called the ‘Trump rally’ by financial market pundits and analysts alike. Do such monikers risk confusing cause and coincidence? How much of today’s undeniably rosy cheeked US economic health can we attribute to the US President?
Surveys and data seem to suggest that this welcome change in corporate disposition, and therefore stock market trajectory, actually occurred in the summer before the US election. Ironically, this is about the time when the UK’s electorate chose to secede from the euro area, when fears that populism and nativism would trample over post war constitutional defences across Europe, were at fever pitch. There are any number of explanations for this seemingly unlikely turning point, from China’s looser policy stance at the time to a recovering backdrop for oil investment around the world. Then candidate Trump, can unfortunately lay claim to none of them.
The breakdown of stock market returns between changes in dividends, earnings and valuation is, again, not supportive of the President’s claims. If President Trump’s arrival in the oval office was indeed responsible for the majority of the stock market’s rally, we would expect equity returns over this period to be dominated by valuation expansion, given that none of the President’s pro-business legislation was passed until the end of 2017. However, in reality, valuation expansion accounted for less than one-third of last year’s US stock market rally. Extending this analysis to other regions, it’s clear that valuations account for a very small percentage of stock returns for 2017. The inference being that the ongoing rally in global stocks rests primarily on the improving economic backdrop, rather than the so-called ‘Trump Rally’.
The administration has admittedly managed to pass what is surely the largest and most complicated piece of tax legislation since 1986. This massive tax cut will certainly boost corporate earnings in the next two years and has surely added pep to the stock market.
However, neutral observers point out that this is a very large tax cut when the economy is already strong and the budget outlook already poor. Meanwhile history gives us very little cause to believe that such a tax cut will change the trendgrowth rate of the US economy or her constituent corporate sector, particularly one so focused on already existing investments and the already wealthy. The sense is that while this may make for good politics with midterm primaries approaching, it is unlikely to make for good economics long term.
Rumours are again circling that a federal indictment of the US President could happen this year. However unlikely, asking ourselves how much of this post election day stock market rally can really be chalked up to this US administration is important to consider. Our point would remain that buoyant capital markets primarily reflect economic forces already in motion rather than any change of political personnel. We should probably also remember that even if an indictment did materialise, actual impeachment would require both a simple majority in the House of Representatives and a super majority in the Senate. Surely still a tall order with both chambers currently controlled by the Republican Party and the mid terms still offering more downside than upside in terms of seats up for grabs.
The temptation to commandeer chunks of economic history, both recent and distant, to support one particular ideological leaning or other is always strong. Voters may feel reassured by the potency of their vote, or their ideology – why should we trudge to the polls without such power. However, the real world is routinely messier, as we’ve regularly pointed out. Politicians are more often in yoke to the underlying economy and its pre-existing eccentricities and idiosyncrasies, rather than the other way around. The ability to get rid of our tyrants and bores after a period of years rather than decades is still to be treasured all the same.