Is the US Market Bigger than the Presidency?
The US stock market has demonstrated ongoing strength following Donald Trump's election victory, with the S&P 500 surging 3.8% in the first four trading days after Election Day and breaking the 6 000 level for the first time.
However, market experts at Stonehage Fleming suggest that long-term market performance may be less influenced by presidential politics than many investors assume.
"Weirdly enough, despite all of the short-term noise, the historical evidence suggests that the stock market is largely indifferent to who's running the country," notes Graham Wainer, Stonehage Fleming Investment Management CEO. "Looking back in history, you can hardly see daylight between the Democratic and Republican eras for returns, with the median performance of the former 9.3% and the latter 10.2% since the Eisenhower administration."
The sheer scale of US markets helps explain their independence from political shifts. The combined market capitalisation of the NASDAQ and New York Stock Exchange approaches $60 trillion , with state-level legislation often having more direct impact than federal policy changes.
However, bond markets have reacted more circumspectly to Trump's victory, with yields rising sharply as investors weigh the implications of promised tax cuts and spending increases. The Congressional Budget Office projects that debt service costs could exceed $1 trillion next year, surpassing defence spending.
Bryn Hatty, Stonehage Fleming CIO in South Africa, emphasises a measured outlook: "Our assessment is that the incoming Trump administration will engage in pro-growth, business-friendly policies overall, but they will need to be palatable for investors, consumers and voters. The probability of a 'reflationary' scenario is undeniably higher, with both growth and inflation running hot, but it is important not to disregard prior trends."
Stock Market Performance and Outlook
The equity markets have shown significant momentum but face critical turning points:
• The S&P 500 gained an impressive 25% year-to-date, the Nasdaq composite increased 29%, and the Russell 2000 rose more than 15%, according to Bloomberg statistics.
• Consumer discretionary and financial sectors have emerged as the strongest performers post-election, driven by expectations of looser banking regulations and easing financial conditions.
• Healthcare stocks have faced significant headwinds following Trump's appointment of vaccine sceptic Robert F. Kennedy Jr. to lead the Department of Health and Human Services, leading to notable declines among vaccine manufacturers and other healthcare companies.
Bond Market Concerns
The fixed-income market has shown increasing signs of stress:
• The 10-year Treasury yield has risen markedly since September, reaching 4.4%, as investors anticipate several trillion dollars in additional deficits from proposed income tax cuts.
• Federal debt service costs have seen a dramatic increase from $345 billion annually during Trump's last term in 2020 to projected costs exceeding $1 trillion next year
• The nonpartisan Committee for a Responsible Budget estimates Trump's proposed fiscal plans could increase the national debt by $7.75 trillion over the next decade.
• Trump's proposed tariff policies, including a 20% Universal Tariff, 60% on Chinese goods, and 100% on Mexican car production, risk reigniting inflation just as the Federal Reserve has managed to bring it down to 2.6% from its peak of 9.1% in June 2022
These market dynamics present a complex challenge for investors.
Investment Strategy Impact
Stonehage Fleming maintains a structural emphasis on US markets, particularly focusing on:
• Domestically-tilted US smaller companies
• Exposure to US reindustrialisation initiatives
• Balanced portfolios, including traditional government bonds
• Alternative assets such as catastrophe bonds and physical gold
"The range of possible scenarios is notably wide," Hatty adds. "Our investment approach ensures we consider a range of outcomes for our underlying investments, pursuing robust and well-diversified portfolios."
While some analysts draw parallels to the UK's 2022 market turmoil under Liz Truss, the size and depth of US markets provide greater stability. Nevertheless, bond vigilantes could still influence policy direction if fiscal expansion threatens economic stability.
The coming months will be crucial as markets assess the practical implementation of campaign promises against economic realities. With unemployment trending upward and financial conditions remaining tight, careful navigation of policy choices will be essential for maintaining market confidence.
