Donald Trump has now been US President for exactly one year. Plus a few days, to be exact – the presidential election actually took place on the 8th of November 2016.
The Trump triumph was one of the most unexpected political successes in history. My colleagues Jim Rickards and Tom Tragett were savvy enough to predict it in print, but hardly anyone else did.
The last 12 months have been suitably turbulent. Opinions about America’s leader remain just as polarised. Indeed, there still are enough aspects and unanswered questions about the Trump presidency to enable this article to last forever.
No one wants that. So let’s focus on a key issue for this side of the Atlantic.
What does a continuing Trump presidency mean for your finances?
I’ve also been looking back to see what I wrote just after the Trump victory – and to examine whether my forecasts have since come true.
Well, they haven’t.
But that’s not because my predictions have been wrong. There simply weren’t any. I freely admitted that I didn’t know what would happen in financial markets following Mr Trump’s victory and I conjectured that no one else did either. We were looking at what the former-US Defence Secretary Donald Rumsfeld called the “unknown unknowns – the ones we don’t know we don’t know”.
Looking back, maybe sitting on the fence wasn’t such a bad idea.
Forecasting the President’s progress has been very tough.
Read just some of the headlines and it’s surprising that Trump is still in the job. He seems to spend most of his time arguing with someone, quite often his own Republican party. Alienating your colleagues isn’t generally the best way to get ahead in politics, as Theresa May could be about to discover to her cost.
More blunders even than specialist gaffe-meisters such as Prince Philip would have forced most other people into silent embarrassment. But not our Donald. He just keeps on upsetting the world on Twitter.
Meanwhile, opponents keep threatening impeachment (i.e. removal from office) due to a variety of alleged misdemeanours by the President. Yet there’s also talk about ‘two-terms Trump’ – the incumbent being re-elected for a second spell in office.
So shedloads of uncertainty, then.
And we’re always told that financial markets hate uncertainty.
Yet often it’s the opposite. They can thrive on it. That’s why bull markets are said to “climb a wall of worry”.
In other words, stock prices rise when plenty of people say that they shouldn’t. You couldn’t get a better example than the last 12 months.
The S&P 500 index is the most widely-followed equity benchmark in the world. It sets the tone for stock markets everywhere else, including in London.
In 2004, analysis by economic professor Marshall Nickles found that, since 1950, all major American stock market declines occurred during the first or second years of the four-year US presidential cycle. (Granted, the Obama presidency saw constantly rising US share prices, but that was in the wake of the 2008 great financial crisis that was ‘solved’ by central bank funny money driving equities higher).
Following the Trump triumph, history was expected to repeat itself.
Consensus opinion said that US shares would plunge. In fact, they fell for only a few minutes. They’ve been going up almost in a straight line ever since. The S&P is now at an all-time high that’s some 20% above the level of 8 November 2016.
This has helped the FTSE 100, which has had to contend with its own political issues, gain around 10% over the same period.
Then there’s the US dollar. Again this was expected to plummet in the event of Mr Trump winning the day. Again, after a brief wobble, the buck went up.
Sure, on balance the dollar is lower than a year ago. But that’s mainly due to the strength of the euro and a post-Brexit poll recovery in sterling. America’s currency has generally been resilient elsewhere.
Bottom line: Trump’s been great for shares and OK for the dollar.
So what happens now? As I said at the start, this article isn’t about conducting an in-depth analysis of the US political scene and all its nuances.
From possible impeachment to the prospect of Trump being re-elected for a second term – I still don’t have a clue as to how his Presidency will play out.
But Trump may no longer be the key to financial markets. Bigger factors are at work.
Shares prices consist of two elements, namely earnings and valuation. US presidents are most able to influence the former, e.g. via legislation. But earnings haven’t sent stocks to all-time highs. Valuation – how much investors are prepared to pay – has.
While that central bank funny money has lifted valuations sharply – to dangerously high levels – that process may be ending as US monetary policy tightens. This could cause a major equity sell-off, regardless of what the President says or does.
In truth, he’s less powerful than new Fed boss Jerome Powell whom he’s just appointed. Your US stocks would suffer from fall in the S&P, as would equity holdings everywhere.
On the dollar, there’s bound to be lots of talk about future relative interest rate differentials. That’s jargon for saying that the Fed is more likely to raise interest rates than anyone else. In theory that should push the dollar higher.
Against this, the US is steadily going bust. It’s already piled up more debt than it can handle and is racking up more every day. Trump’s tax-cutting plans could take the country’s borrowings to the brink.
If America were to default, your US-based assets would take another hit. By that stage the global financial system could be one the verge of collapse once again. And the tried and tested way of protecting your portfolio is holding gold.
As our resident gold expert Simon Popple points out, “For people who like a more tangible asset (in troubled times), gold is king.” These are indeed troubled times, which makes the major gold opportunity Simon recently identified all the more urgent.
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