A year of President Trump: seven charts that reflect market reaction
Donald Trump became president of the US on 20 January 2017. Markets reacted positively to his pro-business rhetoric and his promise to cut taxes and spend big on infrastructure.
The global economy was already picking up a significant head of steam for the first time since the financial crisis. But Trump’s election and his policies were viewed as a potential further boost to business and economic growth.
A year on, and with Trump only just beginning to pass his policies into legislation, financial markets have continued to rally. Stock markets, commodities and bonds have all made positive returns and volatility, or market turbulence, has remained low.
Here, we take a look at what has happened in seven simple charts.
Stock markets
Global equities have performed strongly, with many markets hitting record highs.
US shares have registered gains of nearly 20%, with a similar return for equities globally. But it is emerging markets and European stocks that have performed best.
Emerging market stocks have returned 38.5% since 20 January 2017 and European stocks have achieved a 27% gain.
A year of Trump: Emerging market stocks gain the most
Stock market total returns since 20 January 2017 – rebased to 100
Past performance is not a guide to future performance and may not be repeated. The return may increase or decrease as a result of currency fluctuations. This material is not intended to provide advice of any kind. There can be no guarantee as to the magnitude of any future market movements. Source:Schroders. Thomson Reuters Datasteam data correct as at 09 January 2018. MSCI Emerging market, World Ex-USA, Europe and US total return indices all in USD rebased to 100.
Stock valuations
The US market was considered expensive, on some measures, before the recent rally.
One of the most popular measures compares prices with earnings to establish a ratio. Lower figures suggest better value. On this measure, based on earnings over the previous 12 months, the US P/E ratio was at 24x in December 2016. A year later the measure remained the same, which is significantly higher than a 15-year average of 18.
A more refined indicator known as CAPE (cyclically-adjusted price to earnings ratio) shows the market has become more expensive over the year. CAPE compares the price with average earnings over the past 10 years, with those profits adjusted for inflation. This smooths out short-term fluctuations. CAPE moved from 28 in late December 2016 up to 31 a year later.
P/E is a measure of a share price compared to its per-share earnings over the past 12 months, expressed as a ratio. CAPE is calculated in the same way as P/E, but using the averaged earnings over a 10-year period, adjusted for inflation. This smooths out the ups and downs of a typical business cycle.
Further measures of value are included in Schroders research published in December 2016 and December 2017.
A year of Trump: US stock valuations
Source: Schroders. Thomson Reuters Datastream. Historic Data covers 15 years to 30 November 2017. For information purposes only. This material is not intended to provide advice of any kind.
Given the support equities have had from Trump’s aims for the US tax system, passed by the Senate in December, much focus will be on the impact that follows once it becomes legislation.
Jenny Jones, head of US small & mid-cap equities at Schroders, said: “There are a lot of nuances as the new tax law plays out. In particular, corporate spending, repatriation of overseas cash and whether or not it will be brought back to the US.
"If it is, will it be converted into capital expenditures? That is a critical question.
"We think much of the initial impact of the bill is in the market. But we believe that in 2019 we will get a better view on its true impact on consumer and corporate behaviour, not to mention valuations.”
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Stock market sectors
When looking at sectors, it could be said that a rising tide lifts all boats.
In a year when most major stock markets hit all-time highs, it is perhaps no surprise that the 10 major global MSCI sectors registered gains.
Technology stocks have led the way, up 35.7%. Materials (24.8%), industrials (23.2%), consumer discretionary (21.7%) and financials (20.2%) also bettered the performance of the MSCI World.
The main underperformers were telecoms, up 1%. Energy, which includes oil producers, gained 6.4% and utilities, which is made up of energy and water suppliers, rose 9.4%.
A year of Trump: technology stocks the standout performers
% rise since 20 January 2017
Past performance is not a guide to future performance and may not be repeated. The return may increase or decrease as a result of currency fluctuations. This material is not intended to provide advice of any kind. There can be no guarantee as to the magnitude of any future market movements. Source:Schroders. Thomson Reuters Datastream data for MSCI World sectors (USD) correct as at 09 January 2018.
Volatility
The VIX, sometimes referred to as the “fear gauge”, is a measure of expected US stock market volatility, looking 30 days ahead. The higher the level, the more fearful investors are of a market-moving event.
Despite sharp spikes in April, May and August the level of the VIX remains well below its 28-year average of 19.3, according to Datastream data. Investors, according to the VIX, remain relatively calm.
A year of Trump: VIX 'fear indicator' remains subdued
Source: Schroders. Thomson Reuters Datastream data for the VIX correct as at 09 January 2018. This material is not intended to provide advice of any kind.
Commodities
The positive story for the economy in the US and elsewhere has fed through to rising commodity prices. Copper has risen by 23% and oil is up 18.3%.
Demand for gold was weaker, with the price rising by 9.1%. When gold underperforms, it tends to suggest that investors are more confident about the global economy. Gold is traditionally a ‘safe haven’ and store of value in troubled times.
A year of Trump: Gold underperforms copper and oil
Gold, oil and copper gains since 20 January 2017 – rebased to 100
Past performance is not a guide to future performance and may not be repeated. The return may increase or decrease as a result of currency fluctuations. This material is not intended to provide advice of any kind. There can be no guarantee as to the magnitude of any future market movements. Source:Schroders. Thomson Reuters Datastream data correct as at 09 January 2018.
Currencies
The dollar has weakened against most major currencies, the dollar has weakened since January 2017.
Of the currencies in the chart below, the dollar has fallen most against the Mexican peso, down 11.2%. It had previously strengthened against the peso after Trump won the election following his comments about trade and a promise to build a border wall between the US and Mexico.
The dollar has fallen 10.5% against the euro and 8.9% against the pound.
A weaker dollar should be good for US exporters whose products will be cheaper for customers buying them abroad.
A year of Trump: The dollar has weakened against most major currencies
% change since 20 January 2017
Past performance is not a guide to future performance and may not be repeated. The return may increase or decrease as a result of currency fluctuations. This material is not intended to provide advice of any kind. There can be no guarantee as to the magnitude of any future market movements. Source:Schroders. Thomson Reuters Datastream data correct as at 09 January 2018.
Government bonds
The graph below shows the total return of 10-year government bonds, which includes the rise or fall of the bond price and the income paid.
UK government bonds returned 2.07% over the period, ahead of 1.65% for US Treasuries. Japanese bonds returned only 0.18% while German bunds registered a loss, at -0.42%.
The weaker performance of the US vs the UK in part reflects the changing outlook for the economy.
Recent economic strength has allowed the Federal Reserve to raise interest rates, which has affected the performance of US bonds. When interest rates rise, bond prices tend to fall because investors can find better value elsewhere.
A year of Trump: UK government bonds returned more than US
Past performance is not a guide to future performance and may not be repeated. The return may increase or decrease as a result of currency fluctuations. This material is not intended to provide advice of any kind. There can be no guarantee as to the magnitude of any future market movements. Source:Schroders. Thomson Reuters Datastream data for 10-year government bonds in UK (gilt), Germany (bund), US (treasury) and Japan (JGB) in local currencies correct as at 09 January 2018.
Important Information: The views and opinions contained herein are those of David Brett, Investment Writer, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The sectors and securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell. This communication is marketing material.
This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. The opinions in this document include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registration No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.