One of the most divisive of US Presidents is about to take office, but loved and loathed in almost equal measure, his supporters and detractors alike will be very keen to know what the new term will mean for investments and how he did in the past.... so here is a look.
Tump was elected in the morning of November 6th.
Q: How did investors react to the Trump win?
Just before the announcement of his win, the Dow Jones was 41,794. Within a week it had risen to 43,190 - a rise of over 3% in a matter of days. Trump has previously been very keen to take the credit for the rise. According to Reuters, during his last term of office, Trump Tweeted over 150 times about the stock market often linking what he was doing to a rise in the market.
It was clear that the stock market also felt that the second Trump election was good news. The election result:
2: The US dollar index, which measures the currency against a group of others, posted its biggest one-day gain since September 2022.
A Volatile Ride
Dow Jones
The market has had a very volatile ride since Trump's election result, in November. Although the Dow Jones rallied straight away, it then fell back. But it's still up aroubnd 3% in under 3 months.
The FTSE 100
In the UK the market also rallied after the election, then fell back. But it is still up almost 6% in the space of less than 3 months.
Q: So does the rise in the market mean it's good for all savers/investors?
Good For Some - Bad For Others
A stronger dollar means it will be more expensive for us in the UK to buy US goods & services and certainly more expensive to go to the US on holiday.
Bad For Home Owners?
To the extent it helps push prices higher in the UK, it will put upward pressure on UK interest rates and that will mean more expensive mortgages. However, base rates in the UK are heading down - so homeowners may hope this continues.
Q: Are Democrats or Republicans Better For The Stock Market
Overall, the strongest stock market performance since the 1980s was under Democratic President Bill Clinton, while the weakest was under Republican President George W. Bush. However, stock market performance over the past four decades reflects no obvious benefit from Republican versus Democratic presidents.
Better The Devil You Know
For those looking for stronger gains ahead, a Trump win may be a favoured outcome. Suggesting that investors favour the certainty of presidents they are already familiar with, the S&P 500 since 1950 has on average risen 9.6% in the year after presidents win re-election, compared with an average rise of 4.8% in the year following the election of new presidents, according to LPL Financial
Q: What About Policies - How Will Trump Effect Businesses?
Trump’s re-election may lead to extension of his Tax Cuts and Jobs Act, likely increasing federal deficits while also supporting corporate valuation multiples.
Analysis by Morgan Stanley suggests that:
Proposed tariffs on Chinese goods, meanwhile, could raise inflation and weigh on U.S. economic growth.
Deregulation in Trump’s second term could benefit sectors such as Energy, Financial Services, Pharmaceuticals and Cryptocurrency, while creating policy risks for clean energy and electric vehicles.
Policy changes may stoke market volatility, but investors should stay focused on their long-term investment strategies and financial goals.
Q: Why is the UK stock market so affected by what happens in the US - how direct is the connection?
Good For The FTSE?
Although the FTSE 100 is supposedly a measure of the UK stock market, all is not as it seems.
Research by the Capital Group claims that 77% of the revenue from companies in the FTSE 100 is earned from their foreign activities. According to the Capital Group, 30% of the FTSE 100’s revenues now come from emerging markets, 19% from the US, 17% from Europe excluding the UK, 5% from Japan, 4% from the rest of developed Asia, and 2% from Canada.
So the irony is that the same Trump effect which could be good poor for the UK economy could at the same time be good for a lot of UK listed companies, which is presumably good for the UK economy. So the Trump effect is pulling us in different directions at the same time.
Experience of 2016 Election
His previous term: Hours after Trump's unexpected win on Nov. 8, 2016, expectations of massive tax cuts and financial deregulation kicked off a stock rally that saw the S&P 500 surge 5% in a month. Wall Street continued its path higher through a trade war and impeachment, going on to new record highs following a deep slump caused by the coronavirus pandemic that continues to cripple the global economy
Q: What UK Companies Might Benefit
A stronger dollar would be positive news for multinational FTSE 100 companies that are listed in London but generate revenue in the US currency.
Trump’s victory could be positive for industrials because of the likely expansion of infrastructure building. So industrial and construction equipment sectors could be set for a boost.
Banks with operations in the US might benefit if interest rates remain high because they have the potential to make more money on loans.
Shares in defence companies are the most obvious potential gainers from Trump’s call for more defence spending by Nato members.
Q: Elon Musk seems to increasingly have the ear of Trump - what effect might that have on the market?
The Smell of Success - Musk
Elon Musk is poised to be very influential as a Trump buddy and advisor. He is about to take up a role as an advisory on cutting government expenses and regulation. Together he and Trump are keen on deregulation and promoting the tech industry. The so-called "Magnificent Seven” US tech stocks — Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla — might bnefit from this position.
Q: A lot of talk about Bitcoin and Bonds - what is happemning there?
Bitcoin
Trump has pledged to make the US “the bitcoin superpower of the world” which might also give this most volatile of speculative assets a boost.
Bonds
Markets are concerned that Trump could borrow more, increasing the government deficit. More government spending or more tax cuts would require more bond issuance and bond prices dropped in reaction to Trump’s appointment.
Traditionally, Republicans such as Trump, have called for deep spending cuts, to offset their plams to cut taxes. But Trump is unusual in Republican terms, in that he has said he does not want to cut those schemes.
As a result, Donald Trump’s economic plans are forecast to raise the federal debt by roughly double the increase which would have been expected had Kamala Harris been elected, according to analysis from the Committee for a Responsible Federal Budget.
Q: What about the effect on the real economy
Generally
More broadly, US tax cuts and less regulation would support banking stocks.
Trade War
Trump’s tariff plans could cause problem, as UK exporters may find it harder to sell in the US. Chinese companies may also suffer. The effects of a trade war will be complex but may not be good news for a lot of investments and companies.
Q: Any reservations about the market's view on what it thinks a Trump presidency will bring?
The Big But
The truth is that since this is not a lab science, you can't hold other influences constant so you can just see the effect of Trump as opposed to everything else. So it is hard to know the influence of the President compared to what else is going on. Nonetheless it is possible to make some general comments and outline some trends.
REALLY IMPORTANT NOTE: No one knows what's going to happen to investments, so don't make any simple assumptions about what might happen in the next few years. If anyone did, they probably wouldn't tell you. So none of this is investment advice in this article or on this website.
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