Opinions about the upcoming US presidential election are divided, both over what outcome is likely, and over what outcome is desirable. One thing we can all agree on, however, is that there are profound differences in both style and substance between Donald Trump and Joe Biden—just as there were between Barack Obama and Donald Trump. The curious thing is that financial markets do not seem to agree with this uncontroversial assessment. If we look at the compounded returns of the major US asset classes, we find that:
- Equities, as measured by the S&P 500, delivered roughly the same return during the Obama years as under Trump: 12.38% annualized for Obama, 13.87% for Trump.
- Long-dated bonds delivered positive returns in the Obama years (6.85%), and even better positive returns in the Trump years (9.85%).
- US dollar cash generated positive returns for European investors under Obama (2.32%), and slightly negative returns under Trump (-0.68%).
- US dollar cash delivered positive returns for Japanese investors in the Obama years (0.8%), and also in the Trump years (1.19%).
In short, both equities and bonds thrived under both Obama and Trump, while the US dollar strengthened marginally under Obama and weakened marginally under Trump. What small differences in performance there were under these two very different presidents hardly seem to justify all the agonizing over likely results that investors invariably do going into elections, including this November’s. This conclusion is lent weight by the sectoral performance of the S&P 500. Breaking the index down by sector, it turns out that:
- Under Obama, the three best-performing sectors were consumer discretionary, technology and health care. Under Trump, the three best-performing sectors have been technology, followed by consumer discretionary, then health care
- Under Obama, the two worst-performing sectors were financials followed by energy. Under Trump, the worst performers were... exactly the same:
This sector breakdown confounds the expectations that most investors held at the start of the Trump administration.
- Big Tech was widely seen as being openly hostile to candidate Trump. As a result, one common fear following the 2016 election fear was that a vindictive President Trump would unleash regulatory hell on Big Tech players.
- With a former property developer in the White House, many investors expected a better performance from the real estate sector. In the event, real estate slipped from just short of the podium in the Obama years, to eighth place under Trump.
- With all Trump’s promises to “make America great again,” bring manufacturing jobs home, and impose tariffs on “unfair” competition, investors might have expected the industrial sector to thrive under Trump. However, industrials finished in sixth place, just as they did under Obama.
- At the start of the Trump years, hopes were high in the financial sector that a wave of deregulation would boost returns. Yet financials finished next to last—again.
- Energy returns were bad in the Obama years, but at least they were positive. In the Trump years, energy was the only sector to deliver negative returns; an unusual outcome under a Republican administration, especially one that proudly slashed the regulatory burdens for energy extractors.
In short, all this raises the question whether the time investors spend discussing and worrying about US politics is really time well spent. The simplest conclusion to be drawn from the charts on the previous page is that the last 12 years have seen a structural bull market in US technology and consumer discretionary stocks, and a structural bear market in energy and financial stocks. For the Apples, Microsofts, Amazons and Domino’s Pizzas of this world, it seems that the occupant of the Oval Office didn’t matter very much. Nor did he seem to make much difference for Exxon, Chevron, Citibank or Goldman Sachs.
In a sense, this feeling that “markets trump politics” is a comforting one, especially when investors are being told that November’s election is the most important in a generation, if not ever. Now, it should go without saying that a lot depends on every election. And if I was American, I’m sure I would feel passionately about the outcome of the vote in six weeks time. But as it is, I’m a non-American investor, and that means it is debatable whether I should really expend too much brain power worrying about the upcoming vote.
- Will monetary policy change after November? Most likely not; the Federal Reserve has committed itself to a very dovish stance for the next three years at least (see The First Meeting Of The Fed’s New Era).
- Will fiscal policy change after November? The beneficiaries of federal largesse may well change if the color of the administration changes. But whether Republican or Democrat, the US government seems committed to running large budget deficits for as far as the eye can see.
- Will US policy towards China change dramatically after November? This is a challenging one to call. That’s partly because Biden, like JD Salinger, is saying as little as he possibly can, in a bid to appear to be whoever anti-Trump voters want him to be. But while US policy on China affects emerging equity markets and maybe the US dollar, so far in this campaign it seems that the anti-China rhetoric has had little if any impact on US equities. If anything, the continued rise in Apple’s share price is a testimony to US corporations’ ability to brush off the anti-China drumbeat as background noise.
This brings me back to a core Gavekal belief: money managers are not paid to forecast, but to adapt. This is doubly true when it comes to politics. In the last US presidential election, when power passed from Obama to Trump, the markets adapted by broadly doing more of the same. Should Biden win November’s election, maybe we will see more of the same once again. Or maybe not; a couple of important trends have recently emerged that really do differentiate Trump’s term from the Obama years.
- The US dollar has been broadly weaker under Trump, while it was broadly stronger under Obama. To some extent, this makes sense. Trump is an avowed mercantilist, and mercantilists typically like having weaker currencies. And when you look at the trajectory of US monetary and fiscal policies, (regardless who carries the day in November) the dollar now seems set on the path to future weakness. In time, this US dollar weakness should start to have an impact on the returns both of US treasuries and of the stock market’s different sectors.
- While the materials sector only just escaped the bottom three under Obama, it has only just missed out ranking in the top three during the Trump years. Importantly, this surge from 9th place to 4th has really only occurred since the March 2020 pandemic bottom. So, can the rally in materials continue? If Biden is elected, it is likely the federal government will pour money into green technologies, which should see an increase in demand for copper, lithium, cobalt, silver etc. But if Trump is re-elected, continued US dollar weakness should go on underpinning the unfolding bull market in the materials sector.
- Finally, one very important divergence between the Obama and Trump years has to do with dispersion. In the Obama years, tech and consumer discretionary outperformed. But all sectors delivered positive returns and the sector dispersion did not appear excessive. In the Trump years, technology and consumer discretionary roared ahead, while the rest of the market delivered very pedestrian returns, with the divergence between the technology and energy sectors reaching extremes. To ram the extent of this dispersion home, in the Obama years, the equally-weighted S&P 500 index outperformed the capitalization-weighted index. Under Trump, the reverse happened.
In other words, while the drivers of the equity bull market might have remained the same under both Obama and Trump, under Trump the advance has become ever narrower. That’s not a healthy sign.