It comes as little surprise to most people that President Donald Trump has attempted to take credit for the US stock market’s impressive run over the past 12 months. If anything, it’s one of the least controversial statements made by Trump during his presidency. But that doesn’t make it any more accurate.
The real reasons for the market’s rise can be attributed to economics and synchronized global growth, not Trump’s rhetoric and big promises. “Trump has incredibly lucky timing,” says Tyler Mordy, President & CIO at Forstrong Global. “By mid-2016, economic momentum in both the US and the broader global economy were evident. That means stocks were likely ready for liftoff, even before Trump took office. But it has been a long — and many would say — well-earned period of outperformance for US assets.”
Both US stocks and the US dollar have comfortably outperformed their global counterparts since the recovery from the global financial crisis began in 2009. By early 2017 the US dollar index had surged to a 14-year high as investors bet that Trump’s ambitious plans for fiscal expansion would bring back the days of early 1980s Reaganomics. But then something unexpected happened. Despite the Fed hiking rates and beginning to shrink its balance sheet, the US dollar stopped rising.
Mordy is in no doubt that America’s volatile leadership has played a key role in the value of its currency. He also thinks that US equities are set to underperform and identifies three key drivers as to why US equity outperformance will go into reverse.
“Firstly, in recent years the Fed was the most aggressive liquidity provider in the world, but this is no longer the case. The Fed is now tightening, while almost everyone else is on hold,” Mordy says. “Also, in recent years, the US benefitted from an extraordinarily competitive currency, but this is no longer the case.”
“In a very short period, the US dollar has gone from being significantly undervalued against almost all currencies, to being fairly valued against most, to now being overvalued against the likes of the euro and the yen. Finally, in recent years, US equities were attractively priced, but this is also no longer true.”
Mordy identifies Europe and Asia as being the most likely candidates for the next phase of outperformance. Both regions have cheap currencies and are showing signs of earnings and economic acceleration and trade on much cheaper valuations.
Mordy says: “Who can argue with rotating into cheaper markets, where business cycles have only just begun their expansion phases, where profits have plenty of scope for improvement and where monetary policy is years away from any substantial tightening?”