Stephen Jones, CIO at Kames Capital Since Trump’s election win, the US economy has grown by 7% in real terms, well ahead of other major developed economies (the Eurozone and Japan have each grown by 3.4% and, despite all the odds, the UK has grown by 4.3%). US equities have returned nearly 50%, 20% ahead of non-US markets while, curiously, the yield on long-dated US bonds is unchanged (2.6%); finally, the US$ has, on a trade-weighted basis, risen 2%. From an investor perspective and with US companies increasing per share earnings by 32%, America has been ‘great again’; who would say “no” to more of the same?
More of the same might be a challenge. US economic outperformance was bought by a significant package of tax cuts that other countries are likely to copy. It is almost certain that before the end of the next US presidential term that the US – if not the World, will enter a recession. Trump may find, as did Gordon Brown, that using fiscal policy pro-cyclically is great for a while but it reduces your scope to deliver counter-cyclical support when you need it most. The US Fed has been able to steadily increase US policy rates while Trump has been in office. Uniquely across the developed World, the US has scope to deliver substantially easier monetary policy; Trump is not going to complain. The pace of US share buy-backs may lessen – given the volume of US corporate cash repatriation already done but the outlook for US equities looks relatively secure.
A second Trump Presidency is likely to prove more challenging for non-US investors. Between now and the next election Trump will doubtless strive to deliver all his outstanding election promises; he now has his wall (of Mexican soldiers) at Mexico’s expense. Tension with China is unlikely to go away but this is largely discounted. Interestingly, and in the same way that Labour didn’t reverse Thatcher’s labour laws, few Democrats seem keen to unwind his regime of tariffs; always good to get someone else to do the ‘wet’ work.
Trump’s rangefinder is likely to be trained on Europe. Germany continues to trade in a currency artificially cheapened by the Eurozone periphery and European defence funding remains problematic. Emboldened by his apparent swift success in using tariffs against Mexico, similar challenges across a range of European industries seem inevitable. Looking elsewhere, with the US now in energy balance, the Middle East is likely to prove a fertile source of nervousness.
Markets under Trump have done a lot better than many might have originally supposed. Looking into a possible second Presidency, the same outcome is likely. One caveat is just how much protectionism the recession unleashes when it hits; things could get messy.