THIS week saw the 12-month anniversary of maverick real-estate mogul Donald Trump’s shock victory in the US presidential elections. It has certainly been an eventful year since, with his chaotic administration mired in controversy and international diplomacy conducted via Twitter.
While many people may feel we have entered a dystopian world with the ascendancy of this most unconventional character to the most powerful office on Earth, for investors at least the last year has delivered quite utopian returns.
Not only did most pollsters fail to predict the result of the election, the market reaction to the Trump win was also very different to the expectations of many experts. 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 including on matters of international trade.
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.
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. Since election day, US equities have delivered a total return of 23.4 per cent in dollar terms and 17.1 per cent for sterling based investors.
Analysis by Deutsche Bank reveals that across 41 asset classes, 38 have experienced positive returns over the year. 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 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 per cent, wages in the US are rising in real terms against a benign inflation backdrop and annualised GDP growth has reached the administration’s target of three per cent.
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, the first time this has happened in 90 years of data.
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 election day.
However, it would also be wrong to totally dismiss the impact of the administration, for all its obvious 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 from 35 per cent to 20 per cent as the 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.
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 held in overseas subsidiaries back onshore could simply find its way into share buybacks and dividends. While that would be positive for investors, a risk from here is that expectations of tax cuts are already so baked into spiralling US share prices, a failure to deliver a radical overhaul could see bullishness evaporate.
Should that happen at a time when US monetary policy is also gradually tightening, that could see a reversal some of the stellar gains made over the last year. Policy failure against a backdrop of investor complacency is a risk that investors should be aware of when considering investing in US equities at a time when valuations look expensive on most measures.
Jason Hollands is managing director of wealth management group Tilney.