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Investing in the Trump years

Investing in the Trump years

From 20 January, President Donald J. Trump will hold the keys to the White House and preside over the most powerful office in the world. We consider what this could mean for investors, and if rhetoric turns into reality, what it could mean for the US economy.

Could his bark be worse than his bite?

Why did US markets bounce back so quickly after the result? Investors may have been calmed by his conciliatory victory speech, which contrasted sharply with the bombastic campaign. It raised hopes that he could be a more statesmanlike president than widely anticipated.

Moreover, markets began to price in his domestic economic plans1, which could give the economy a boost over the short and medium term. He wants to increase spending on defence and infrastructure, and cut corporation tax and income tax.

If President Trump can enact some or all of his domestic plans, certain sectors of the US stock market will look appealing. The spending increase bodes well for defence contractors2 and construction firms3. They made strong gains on the day after he was elected.

President Trump has promised to repeal certain environmental regulations implemented by President Obama4, which may be good news for oil and gas-related sectors. He also takes a more lenient view of financial regulation than Hillary Clinton did, which helps explain banking stocks’ buoyancy after the vote, although relief is more likely to be directed at smaller financial institutions.

President Trump will have to garner congressional support to implement many of his plans. Congress could modify the new President’s plans. Although both houses of the legislature are controlled by Republicans. The Republicans lack 60 votes in the Senate to override filibusters and President Trump may face opposition from fellow Republicans over some of his policies. However, markets are betting on a fiscal stimulus emerging, even if it is not as large as the one initially envisaged.

Although the President has more scope to act unilaterally on trade matters, his power is limited. Trump would need Congress to pass tariffs on Mexican and Chinese imports and withdraw the US from the North Atlantic Free Trade Agreement (NAFTA). Protectionism can trigger countermeasures, crimping growth sharply on both sides of a dispute.

How much influence will he have?

“The gap between fiery campaign rhetoric and actual policy implementation is routinely wide,” says Will Hobbs, Barclays’ Head of Investment Strategy, UK and Europe. “In this case, we think that economic self-interest will prevail.”

The broader point here is that a President usually has only a limited impact on the economy. The US Federal Reserve independently handles monetary policy, while fiscal policy decisions are determined by Congress, and structural or technological forces play a key role.

The S&P 500, for instance, recorded impressive returns during Bill Clinton’s tenure, notching up the second-best performance under a president since 19455. But this was due mainly to the technology boom and the widespread adoption of the internet, not Clinton’s economic policies. “Investors remain likely better served by focusing on the fundamental backdrop to the US economy, rather than who presides over it,” says Hobbs.

The good news for investors is that the US economy remains in solid shape. It has been growing for almost eight years now, a year longer than the average upswing since 19456. This is also the second-longest cycle in the post-war period. And the likelihood is that the economy will continue to make steady, if unspectacular, progress.

Two widely-watched leading indicators, the US ISM surveys of both the manufacturing and non-manufacturing sectors, point to solid growth. Meanwhile, consumption accounts for around 70% of US GDP, and is being fuelled by a strong labour market and rising incomes.

The unemployment rate has fallen to just 4.9%, while average hourly earnings are increasing at an annual rate of 2.8%, the fastest rise since the depths of the financial crisis in 20097. Solid overall expansion in the world’s biggest economy bodes well for global output.

However, a tighter US labour market, along with continued overall growth and President Trump’s potential public spending boost, suggests that inflationary pressure could soon return to the US economy. Core inflation (excluding volatile food and energy costs) is close to a four-year high8.

As inflation could well rise, historically overpriced bonds will look less appealing: the fixed interest-rates they offer would become less valuable in real terms. Bond prices could therefore weaken.

This trend would gather momentum if the US Federal Reserve raises interest rates to temper inflation; bond prices move inversely to interest rates. But the solid economic outlook implies a gradual rise in corporate earnings, which underpin stock prices.

Stay diversified to temper the impact of global uncertainty

Global markets may be volatile over the coming months as investors learn more about his intentions, and emerging markets could prove particularly unstable. They tend to rely more on trade than developed countries, so they are vulnerable to protectionist rhetoric.

Furthermore, if President Trump’s spending boost helps stoke inflation, US interest rates should rise. Higher rates on US assets increase their appeal to global investors, making them more likely to sell out of traditionally risky assets such as emerging markets and head for the world’s biggest economy.

The global political backdrop is another worry for markets. The immediate problem is further potential turbulence in Europe. With French and Dutch elections on the horizon, any deviation from the status quo could test the stability of the European project.

While these fears may be exaggerated, markets will always face plenty of uncertainty. The best defence is to adhere to one of the golden rules of investment: stay calm and diversified.

Spread your portfolio across a range of assets, markets and sub-sectors to reduce the impact of losses in a particular area. And don’t panic and flee the market, as market timing is extremely difficult, so you could miss a strong rebound.

How Barclays can help

Investors can gain broad exposure to the US stock market with the iShares S&P 500 UCITS ETF (ISIN: IE0031442068), an exchange-traded fund that simply tracks the main US benchmark index, the S&P 500.

Alternatively, they can choose an actively-managed fund such as the Fidelity American Special Situations fund (ISIN: GB00B89ST70), whereby the manager chooses the shares that make up the fund rather than merely following an index. Please bear in mind that our referring to these investments does not constitute advice or a personal recommendation to invest in these or any other investment. These are only examples. You can find other investments focusing on similar sectors of this type on the Barclays Stockbrokers Funds Market.

Bear in mind that investing in US shares, as with any overseas investments, involves currency risk. A weaker pound boosts the value of your overseas investments, since they will be worth more when converted back into sterling; a stronger pound reduces their value. Please remember that investments can fall as well as rise and you may get back less than you invested. Past performance is not a reliable indicator of future performance.

If you’re unsure whether an investment is right for you, please seek independent financial advice. Investing in stocks and shares is generally only suitable for experienced investors.


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Market outlook for 2017

Global markets face plenty of challenges in 2017, with continuing uncertainty over Brexit, the impact Trump will have as president, and key elections in Europe. Here, we consider what may lie ahead for some of the biggest investments sectors.

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Reviewing your existing portfolio

Successful investing isn’t just a question of allocating your savings to various assets and then sitting back to wait for the profits to roll in. If only it were that simple.

Reviewing your existing portfolio

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Remember:​​​

  • The value of your investments can fall as well as rise and you may get back less than you initially invested
  • Investing is not for everyone, if you are unsure please seek independent advice

References:

1 Dow Jones hits record on Trump stimulus hopes, FT.com
2 Defense Stocks Rise on Donald Trump Victory, The Wall Street Journal
3 Construction, pharma, gold miners seen as Europe's top Trump trades, Reuters
4 Climate change, The New Yorker
5 Democrats vs. Republicans: Who's better for stocks?, CNN Money
6 Barclays In Focus, 28 October 2016 [PDF, 491KB]
7 S&P 500 extends losing run to ninth session, FT.com
8 United States Core Inflation Rate, Trading Economics

Remember:

  • The value of your investments can fall as well as rise and you may get back less than you initially invested.
  • Investing is not for everyone, if you are unsure please seek independent advice.

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