Can Trump confound history?
Bear markets tend to start in a president’s first two years, and right now uncertainty rules
Donald Trump was sworn in as the 45th president of the US on Friday. Whenever there’s a new president, you get a lot of breathless commentary about how he’ll ruin or save the markets. What follows is our pick of these, but first a bit of history.
According to the Stock Trader’s Almanac, in the past 182 years bear markets and recessions have tended to start in the first two years of a president’s term; bull markets and prosperous times mark the latter half. Since 1833, the Dow Jones industrial average has gained an average of 10.4% in the year before a presidential election and about 6% in the election year. By contrast, the first and second years of a president’s term see average gains of 2.5% and 4.2%, respectively.
A notable exception: 2008, when the Dow sank nearly 34%. It then racked up an impressive 27% in the first year of Barack Obama’s second term and 7.5% in the second year.
Conventional wisdom might suggest that Republicans, who are supposedly more businessfriendly than Democrats, would be more beneficial for investors, but looking back to 1900, Democrats have been slightly better for stocks, with the Dow up an average of nearly 9% annually when the Democrats are in control, compared with nearly 6% per year during Republican administrations. But BlackRock chief investment strategist Russ Koesterich says a focus on which party wins the White House is unwarranted.
Following Trump’s inauguration, the level of consternation in the markets is palpable.
“America will start winning again, winning like never before,” he vowed in his inaugural speech, emphasising that he would promote policies that put “America first”.
“There is much we don’t know about how the Trump presidency will play out,” says Peter Schiff, CEO of Euro Pacific Capital, “but of one thing, we can be fairly certain. President Donald Trump is very likely to preside over the largest expansion of federal budget deficits in our history.”
The hand-wringing has mostly centred on the “unpresidented”, unscripted, Twitterhappy nature of it all. The uncertainty of how the Trump presidency will affect stocks, bond markets, commodities, the flow of trade and economies across the globe.
“In my almost 43 years on Wall Street, I am not sure that I have ever seen so much consternation,” says Mark Grant, chief strategist of Hilltop Securities. “It is not just differences of opinion, but it is a quite real fear of the unknown.
“People just don’t know what they are getting into or where the country is heading.”
David Lafferty, chief market strategist at Natixis Global Asset Management, feels Wall Street has initially been too eagerly focused on the benefits of a Trump presidency and has not paid sufficient attention to the potential negatives including his protectionist posture.
“In recent weeks, though, the market has come to take a more measured view of Trump’s proposals. Creating legislation is never as easy as it seems, even with both houses of Congress under Republican control.”
Still, Lafferty is hopeful: “If Trump can tone down the antitrade rhetoric, his platform of spending, lower tax and deregulation should bolster growth.”
“Right now uncertainty is at a peak,” George Soros said at the World Economic Forum’s annual meeting in Davos. “And uncertainty is the enemy of long-term investment. So I don’t think the markets are going to do very well .... You’ll have the various establishments fighting with each other”, leading to unpredictable outcomes.
While Trump’s first speech after his election victory struck a noticeably conciliatory and “presidential” tone, Friday’s speech “was a big departure from that. He rebuked the establishment who were standing right next to him, he expounded the benefits of ‘America First’, and his speech struck multiple notes on protectionism, from manufacturing, trade, jobs, defence and foreign policy.”
Philip Marey, senior US strategist at Rabobank, sounded a note of caution about the potential effect of Trump’s plans. “Increased government spending and lower tax revenues may push up the public debt trajectory, but could hurt the longterm outlook for the US economy,” he said. “What’s more, Trump’s trade policies could backfire rapidly and undermine the positive impact of his fiscal policy initiatives.”
History suggests the stock market will give Trump a fairly warm welcome, but it will be up to him how long the good feeling lasts. A president’s first 100 days in office have most often seen market gains, though the pattern has been better for Democrats than Republicans. Since 1953, the S&P 500 has risen an average of 1.6% in the first 100 days of a presidency, posting gains 70% of the time. However, the index dropped an average of 0.4% under the five Republican presidents during the period, though it rose 60% of the time.
“Trump is taking office at a time of cross-currents,” says Jeff Cox, financial editor at CNBC. “Economic data have been generally on the upswing. Corporate America has emerged from a profits recession, with earnings reports so far suggesting a 3.2% increase for S&P 500 companies in the fourth quarter.
“Trump also takes office amid the second-longest bull market run in history, so some kind of pause wouldn’t seem out of order. Investor sentiment is at its lowest point since the election, with just 37% of respondents to the latest American Association of Individual Investors survey in the bullish camp.”
Jeffrey Saut, chief market strategist at Raymond James, writes in an Inauguration Day note to clients: “Our models continue to show that weakness may be approaching in the short term, but stay flexible because it seems ‘the inauguration will be a top’ theory has picked up steam across the investment landscape, and it would be so like Mr Market to surprise everyone by rising once again over the next few days.”
He adds: “Dow 20,000 and the recent highs in the S&P 500 are just sitting there looking attractive, so this could very well be a case where the market rallies briefly, hits those targets and then falls. So stay alert, because volatility may be about to welcome Donald Trump to the highest office in the land.”
Art Hogan, chief market strategist at Wunderlich Securities, says: “The market can go higher, but that’s based less on Trump coming in and more on the fact that fundamentals are better. All sorts of things that could provide stimulus to an economy that’s already improving can be brought forward, but none of it is going to happen in the first 100 days.”
IN MY ALMOST 43 YEARS ON WALL STREET, I HAVE EVER SEEN SO MUCH CONSTERNATION. PEOPLE JUST DON’T KNOW WHERE THE COUNTRY IS HEADING