At a glance, U.S. equity markets seem to be moving along swimmingly – as we’re frequently reminded by U.S. President Donald Trump.
He’s not entirely wrong. In Canadian dollar terms, the S&P 500 is up close to 17% YTD as of the end of October. The gains are great, but does a Trump economy outweigh plentiful Trump risks, including impeachment proceedings, trade troubles and Fed tensions? And how much credit does he deserve?
Trump did provide a bump – at the start
“He does deserve a lot of credit,” says Charles Myers, a former senior member for both Obama and Clinton Presidential campaigns and chairman at Signum Global Advisors. He says his tax cuts and massive deregulation efforts were significant contributors to the rally we’ve seen.
“His tax policies led to earnings growth,” agrees Kevin Headland, Senior Investment Strategist at Manulife Investment Management, who also credited Trump with significant repatriation of U.S. assets and a pro-business environment. However, he cautions that Trump’s pro-business policies came early into his mandate and are “less and less” a success factor now.
Current success is more to do with a low yield, easy credit environment, Headland says, adding that there has been a “lack of alternative choices for investors – bonds with their negative yields have led to a bias towards equities.” Myers also adds that international weakness has helped prop up prices in the US.
Now, when discussing Trump, people think of the ongoing impeachment discussions more than business sentiment – but the market doesn’t seem to care too much about that.
Impeachment’s a side-show; the election is the main event
“The markets are right to ignore the impeachment proceedings for now,” says Myers. “A trial in January or February might have an effect – but for the next month and a half it’s a side-show.”
Plus, even if the impeachment progresses, “usually impeachment alone is not enough for the markets to crumble,” says Angelo Katsoras, Geopolitical Analyst at National Bank, noting that there need to be other contributing factors. He points to the Nixon impeachment, when markets fell following a spike in oil prices [following the 1973 Arab-Israeli war, followed by a jump in inflation. “If we look back at the Clinton impeachment episode, it was marked by a brief market correction mostly caused by the Asian financial crisis, the Russian debt default and the failure of the giant hedge fund firm Long-Term Capital Management.”
“We might see some short-term volatility from headline news [related to the impeachment proceedings],” says Headland, “the main risk is the election – and the risk from the results.”
Trump’s deflections and damage to a frontrunner future election opponent are seen as the greatest potential threat to markets out of the impeachment if he’s fired.
“The impeachment inquiry’s first victim will be Biden – when it goes to the Senate, likely Biden and his son will be asked to appear,” says Katsoras. “The damage to Biden has been done,” adds Myers. Forget about Michael Bloomberg, he said, “he played right into Elizabeth Warren’s hand by being another billionaire.”
Energy sector emissions control, higher wages, cheaper student loans and stronger antitrust regulations are all established Warren policies and have Wall Street worried. Myers, however, says to take the worries with a grain of salt. “The concerns are overblown – you might see a brief discount.”
Trade’s still the immediate threat
“China has the upper hand,” says Myers, “every decision Trump makes [related to the trade deal] will affect the election.”
Myers says U.S-China trade discussions are moving “closer and closer” to a Phase 1 agreement [although not likely by the end of the year]. He still sees ongoing volatility in the talks but notes there’s a mutual interest in de-escalation. Headland agrees, “trade wars do not benefit either side,” adding that weakening global fundamentals could be a motivator for resolution.
When it comes to Trump potentially leveraging the situation in Hong Kong to push a deal through – don’t expect any major maneuvers, says Myers. “Trump will be trying to not upset China too much,” he says – noting that the expression of outrage is likely to be left to congress [and the Senate with their recent bill on human rights in Hong Kong].
Trump’s also hesitating to pick a fight with Canada – and one deal that is likely to make it through before the end of the year, Myers says, is the USMCA (‘the new NAFTA’).
Where Canada comes in
Myers says that there’s enough bipartisan support to pass the USMCA. “Nancy [Pelosi]’s looking for a breakthrough – and it’s going to be a net positive for Canada.”
Myers adds that Canadians should take comfort to the extent they’re isolated from most of the woes our neighbours down South are currently facing internally and internationally. In the new year, however, there are “conversions of big risks” that could make their way into Canadian portfolios. “If the selling starts [next year] – it will be fast and painful.”
“If there’s a trial, and the President fights back,” it could take a toll on markets, says Myers. “If [Elizabeth] Warren wins the Democratic primaries, you’ll see a discount to markets in March, he adds. And “the U.S. will weaken into the new year, with the weak global backdrop.”
That weak global backdrop seems to be at least one certainty for Canadian investors next year. We’re headed for slim-pickings. “It’s harder and harder to find opportunities [these days],” says Headland. Expect “below-average returns and average risk.”
What can Canadians do to prepare their portfolios for an ominous 2020? “Revisit winners – trim profits,” says Headland. “Go with managers that have been proven to protect,” says Headland, and most importantly, “be cautious, not fearful.”
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