Will Trump be good for stocks?

It’s that time of the presidential cycle again: when a new leader takes over, and the financial media produces a flood of articles speculating on his likely impact on stocks.

829-Clinton-1200

Stocks did well under Clinton, but he was just riding a boom

© REUTERS / Alamy Stock Photo

It's that time of the presidential cycle again: when a new leader takes over, and the financial media produces a flood of articles speculating on his likely impact on stocks, and assessing his predecessor's performance. Barack Obama presided over the third-best stockmarket showing since the World War II, says Matthew Heimer on Fortune.com.

The S&P 500 returned an annual average of 12% during Obama's eight years. Only Bill Clinton and Gerald Ford did better, with annual gains of 14.9% and 18.6% respectively. Democrats have outperformed Republicans since 1945, with respective average annual gains of around 10% and 6%.

Investors should, however, ignore discussions of this kind stocks don't care who is president. Stock prices usually go up in any case, and correlation is not causation. More broadly, other people than the president are more responsible for economic and corporate performance on a president's watch, says John Authers in the Financial Times. There is a limit to what a president can do: his programme can always be stymied in Congress, while the wider economic backdrop is crucial. Ford benefited from the rebound from the global oil crisis; Clinton rode the technology boom.

Obama's performance is due largely to loose monetary policy from the Federal Reserve, which has given the post-crisis rally a lot of extra pep. The only variable that can really help us gauge what markets could do under a particular president "as with any investment" is the "starting price", says Authers. Valuations eventually revert to the mean, so value is the key determinant of long-term returns.

Using the cyclically adjusted price/earnings ratio (Cape) as a measure of long-term value, it's no wonder Ronald Reagan managed annual average returns of 9.4%. He took over when the Cape was in single digits, with the markets bombed out after a decade of high inflation. George W Bush took over when the Cape had hit 37, the most overvalued market under any president. The bear markets of the 2000s reduced valuations to a much more reasonable 15. The average since the late 19th century has been 16.

Today, the Cape has reached 27, a level exceeded only in 1929, 2000 and 2007 all of which marked the peaks of huge bull markets. This reflects the fact that we are far closer to the end of the cycle than the beginning. Indeed, this recovery has been one of the longest since the war. So long-term returns are unlikely to be very impressive from here. If President Donald Trump manages two terms, he is unlikely to finish ahead of Clinton or Obama in the presidential league table.

Recommended

Interest-rate rises mean more pain for stocks
Stockmarkets

Interest-rate rises mean more pain for stocks

Interest rates are rising around the world as central banks try to get inflation under control. That’s hitting stockmarkets – and there is more pain t…
13 May 2022
Anna Macdonald and Mikhail Zverev: Investing in innovative new frontiers
Investment strategy

Anna Macdonald and Mikhail Zverev: Investing in innovative new frontiers

Merryn talks to Anna Macdonald and Mikhail Zverev of Amati about investing in growth-focused innovation in the teeth of a tech-stock selloff, and the …
12 May 2022
The tech-stock bubble has burst – but I still want a Peloton
Stockmarkets

The tech-stock bubble has burst – but I still want a Peloton

Peloton was one of the big winners from the Covid tech boom. But it's fallen over 90% as the tech stock bubble bursts and and everything else falls in…
11 May 2022
We’re in a bear market – change the way you invest
Investment strategy

We’re in a bear market – change the way you invest

The financial world of 2022 is a very different one to that of 2021. Investors need to make substantial changes to their portfolios, says Merryn Somer…
9 May 2022

Most Popular

High inflation will fade – here’s why
Inflation

High inflation will fade – here’s why

Many people expect high inflation to persist for a long time. But that might not be true, says Max King. Inflation may fall faster than expected – and…
13 May 2022
Cryptocurrencies are crashing – so how low will bitcoin go?
Bitcoin & crypto

Cryptocurrencies are crashing – so how low will bitcoin go?

The entire cryptocurrency sector is crashing, with bitcoin now well below $30,000. This is big, says Dominic Frisby. So just how low could bitcoin go?
12 May 2022
What the Ukraine crisis might mean for ESG investing
Advertisement Feature

What the Ukraine crisis might mean for ESG investing

The Ukraine crisis has brought many of the issues around ESG investing into sharper focus. Where does the sector go from here?
3 May 2022