President Trump has touted that one of his major accomplishments is the strength of the US stock markets. They have done well since he was elected with the Dow up 19%, the SP 500 up 16%, the NASDAQ up 26% and the Russell 2000 up 9%. This article explores seven reasons why these markets could have also done very well if Hillary Clinton had been elected President along with three reasons Trump has helped the markets.
1) Worldwide economic growth
According to the IMF or International Monetary Fund worldwide economic growth in 2016 was 3.2%, which was the weakest since the global financial crisis. In October the IMF increased its forecast for 2017 and 2018 by 0.1 percentage points to 3.6% and 3.7%, respectively. The report said “Broad-based upward revisions in the euro area, Japan, emerging Asia, emerging Europe, and Russia more than offset downward revisions for the United States and the United Kingdom.”
There has been a lot of discussion among investors about the strengthening economies around the world which has helped fuel the stock market. I believe this global rebound has not been driven by President Trump and would have still occurred if Hillary Clinton were President.
2) US companies are reporting solid revenue and earnings growth
Factset estimates that the SP 500’s earnings will grow from $119.56 in 2016 to $131.58 in 2017, an increase of 10%, and then to $145.87 in 2018, up another 11%. This is after three years of flat earnings (partly driven by the downturn in the energy sector companies) so the upturn in growth has helped stock prices increase.
I don’t believe many if any of Trump’s initiatives have helped generate better financial results for companies in 2017. No major legislation has passed and in some ways not getting bills done may have created some uncertainty which is rarely good for the stock market. And I believe there is little if any tax reform benefits baked into the projected earnings.
3) Market gains being driven by a handful of stocks
Take a look at the FANG (Facebook, Amazon, Netflix and Google/Alphabet) and a few other stocks such as Apple, Intel and Microsoft. They have performed very well as Facebook is up 57% this year, Amazon is up 50%, Netflix is up 58%, Google/Alphabet is up 33%, Apple is up 53%, Intel is up 33% and Microsoft is up 38%.
Per Michael O’Rourke at Jones Trading (no relation to me) the top five companies that have driven the SP 500 increase this year (Apple, Facebook, Amazon, Google/Alphabet and Microsoft) account for 29.7% of its increase. The top 10 (which then include DowDuPont, Visa, NVIDIA, Boeing and Johnson Johnson) account for 40.2% of the total gain. I don’t think Trump has had much influence on these companies and their subsequent impact to the stock market.
4) US interest rates are still low
The Fed has been on a very slow path to raise interest rates this year while the European Central Bank (ECB) and the Bank of Japan (BoJ) are still buying bonds and in the case of Japan also buying equities which help drive up stock prices. With low interest rates there is still a TINA (There Is No Alternative) mindset that one of the few places to generate returns is the equity market. I don’t believe rates would be very if any different if Hillary Clinton was President.
5) Flows into Index funds helping the market
There has been a steady stream of money coming out of actively managed investment funds and flowing into Index funds. As this happens I believe the net effect is to drive the Indexes higher. While there is selling of some of the shares out of the active funds that are in the Index that overall there is a net positive impact since any non-Index shares being sold go into buying Index shares. Since most Indexes are market cap weighted the incoming funds are flowing to the mega-cap stocks which at the margin probably help fuel their increase (see point 3 above). I don’t think Trump has had an impact on this trend.
6) Fewer concerns that Clinton would upend trade
Trump talked a lot about imposing tariffs during the election and it does seem like his rhetoric has decreased since becoming President. He immediately withdrew from the TPP (Trans-Pacific Partnership) and is trying/hoping to replace it with bi-lateral agreements. However this could lead to China becoming more of a trade competitor as the countries that were in the TPP look elsewhere to help their economies. Clinton may have withdrawn but I believe she would have stayed in it and tried to get some changes.
Trump may also upend NAFTA as he tries to get it changed. This is a fairly big wildcard since Canada and Mexico are such big trading partners. Since I believe Trump’s trade positions are at the margin negative for companies and therefore their stocks I don’t think Clinton would be having this impact.
7) Fewer concerns about going to war with North Korea
Without passing judgment on Trump’s North Korea strategy (if he has one) his comments and tweets can have a impact on the stock markets. While these tend to be short-term they can still be an overhang. I doubt that Clinton would be having this impact.
Other countries stock markets are also strong
This may not have as much a direct impact on the US markets but emerging and non-US stock markets are having a very strong year. While there could be a benefit to the US markets as investors perceive other economies are doing better if funds are moved from the US to other countries then it is a bit of a drag on our markets.
There are three reasons why the markets may not have done as well if Clinton had been elected. While these are more “soft” data-points it is reasonable to say that they are due to Trump.
1) Potential tax reform
Tax reform or at least lower tax rates are finally coming to a head in the House and Senate. It is still uncertain what will be passed if anything but the hope is there. I believe very few investors have actually baked better numbers into their market forecasts but a portion of the benefits are probably in the market.
2) Fewer regulations
Fewer regulations probably haven’t led to better financial results yet but the anticipation of this is probably in some of the company’s stock prices. The financial stocks are one of the beneficiaries as less oversight or fewer lawsuits should lower their operating expenses.
3) Consumer confidence
Consumer confidence has increased substantially since Trump was elected. Part of the reason is probably due to lower unemployment but wages have not shown a substantial improvement. While confidence is more of a “soft” data-point if people are willing to spend more money or companies increase their investments then it helps the economy.
It can be argued about how well the stock market would have done under Hillary Clinton but when you look at what has actually transpired in worldwide economies and why the stock market has risen I believe a very good case can be built that the markets would have also done very well under Clinton.