Trump's victory 12 months on – is America great again for investors?

Initial reactions

Not only did most pollsters fail to predict the result itself, the market reaction was also very different to the expectations of many commentators and investment institutions. Before the election, there were stark warnings about a likely negative reaction in the event of a Trump victory given his lack of experience of elected office, erratic behaviour and controversial views.

Within hours of the result, however, attention rapidly recalibrated around his package of proposals to reflate the US economy which included a massive programme of infrastructure investment, deregulation and major reform of the US tax code.

US equities have surged

While progress in enacting his election agenda has been slow as the president has lurched between controversies and struggled to carry the support of even fellow Republican law makers in Congress, US equities have nevertheless surged higher.

As seen in the graph below, since Election Day US equities have delivered a total return of 23.4% in US dollar terms (but 17.1% for sterling-based investors due to currency movements). Trump, of course, has claimed credit for this – modestly telling reporters “the reason our stock market is so successful is because of me.”

The US economy is in good shape

The US economy is undoubtedly in decent shape, though it is clearly a moot point as to what extent President Trump has contributed to this. Unemployment is at a 17-year low of 4.1%, wages are rising in real terms against a benign inflation backdrop, and annualised GDP growth has reached the administration’s target of 3%.

As for the US stock market, since the president took up office in January the S&P 500 Index has delivered a positive return in every single month (10 months to the end of October), the first time this has happened in 90 years of data.

Business confidence has improved in expectation of tax reforms

The US economy has been expanding for nine years now and its stock market has also enjoyed a prolonged bull run supported by highly accommodative monetary policy from the US Federal Reserve, so the generally positive economic and market environment began well before Trump took office.

However, it would also be wrong to totally dismiss the impact of the administration, for all its flaws, in creating the current environment. Despite the lack of progress in delivering the much-promised infrastructure blitz, the Trump administration has been active in cutting red tape and business confidence in particular has been buoyed by expectations of significant tax reforms – with aggressive cuts to corporate tax rates at centrepiece. If enacted, the proposed cuts will see the US go from having some of the highest corporate tax rates in the world to the lowest.

Will tax reforms boost the stock market?

The extent to which such measures will benefit Wall Street rather than Main Street is debatable, as much of the boost from tax cuts and bringing cash onshore could simply find its way into share buybacks and/or dividends.

The risk from here is that expectations of tax cuts are already so baked into spiralling US share prices, with US equity valuations now looking expensive on most measures, that any failure to deliver a radical overhaul could see bullishness evaporate.

Were this to happen at a time when US monetary policy is gradually tightening and the Federal Reserve’s quantitative easing programme is starting to be reversed, we could see a reversal of some of the stellar gains made over the last year.

Exposure to the US as part of a diversified portfolio

Policy failure against a backdrop of investor complacency is a risk that investors should be aware of when considering investing in US equity funds at these elevated levels. However, over the long term it make sense to have exposure to the US shares within a diversified portfolio, as US equities represent over half of global equity markets. The US is also home to many world class companies, especially in areas such technology and healthcare.

For more information on how we invest in the US at Tilney, or if you have any questions, please get in touch by calling 020 7189 2400 or emailing contact@tilney.co.uk