Since President Trump first took office in January 2017, the US economy has added 6.25 million jobs, house prices (as measured by the Case-Schiller 20 city average index) have risen by +11% and the S&P 500 is up +37%.
Setting aside the usual debate as to what US presidents can and cannot take credit for, based on those narrow metrics alone, the Trump track record is reasonably robust. Indeed, if we assume the sole question that American voters will ask themselves in November 2020 is, "am I better off today than four years ago?" and present trends continue, then arguably voters may well reward Mr Trump with a second term in office.
That said, will present trends continue? In short, we think the odds are more in favour than not, that the current positive economic and financial market momentum will remain intact. First, fears of a US recession being around the corner – which was the prevailing narrative among investors just a few months ago – have receded. This new confidence in the broader economy is evident in the Federal Reserve's decision to pause its interest rate cutting cycle, noting that the US is now in a "good place".
Second, while rate cuts are likely on hold until next year, this does not mean central banks are not loosening policy: asset purchase programs (i.e. quantitative easing or QE) is coming back to the fore, with the Fed, European Central Bank and Bank of Japan all expected to buy assets in 2020. This is important, in our view, as QE is seen as insurance for risky assets, as bond yields stay compressed and investor capital seeks out higher potential returns in equities. Lastly, the booming US labour market shows no real signs of slowing down, implying consumer confidence can stay elevated heading into the election year. All in all, we assume the US economy will grow around +1.7% in 2020.
Going back to 1998, a "not too hot and not too cold" type of GDP growth backdrop of 1 to 3% delivers average annualised S&P 500 returns of +10%. This implies that 2020 may see gains roughly half those of 2019, but still far ahead of both inflation and rock bottom risk-free interest rates. While in our view global equity valuations are looking slightly stretched against their longer-term history, we argue that bonds are even more expensive. This is especially the case given the prevalence of negatively yielding securities and the meagre returns earned on hard currency deposits.
If the case is successfully made for investors to prefer equities over debt, we should then ask the salient question, "Do financial markets 'like' the return of an incumbent president?" Since 1951, the US has had seven presidents that served two consecutive terms: four Republicans and three Democrats. The average S&P 500 return in the 12 months following these presidents' return to office is +9% (the median is similar at +8.4%). Incidentally, Democrats did better than Republicans, with President Clinton holding the record at +34% for the S&P 500 in the first twelve months into his second term, with President Eisenhower having the poorest showing at -15.1%.
In conclusion, when looking out to next year and asking what kind of equity market returns can be expected, there are many other factors beyond the US election to consider. Putting the pieces together, avoiding a recession and the support from QE are, in our view, robust arguments why another year where equities trump bonds appears the most likely scenario.
Stefan Hofer, Chief Investment Strategist, LGT
The information contained in this article has not been reviewed in the light of your individual circumstances and is for information purposes only. It does not purport to provide investment, legal, taxation, or other advice and should not be taken as such. No person should act or refrain from acting on the basis of the content of this article without seeking specific professional advice.