Riding on the Trump Rally, but Prepping for the Trump Reality

Riding the Trump Rally, but Prepping for the Trump Reality

Podcast

Q2 2017 CIO Insights – Global and Non-U.S. Equity

In the four-plus months since Donald Trump’s election, many investors have benefited from the “Trump Rally.” But, recently some have begun to question if the post-election run is ready to take a breather.

Global Markets Rallying

In the time since November’s election surprise, many global equity markets have seen solid gains, and in the U.S., the Dow Jones Industrial Average, S&P 500® and NASDAQ indices have each hit new all-time highs. This is partly due to the Trump Rally, which helped lift those sectors and industries expected to benefit from the new president’s plans to cut corporate taxes, reduce regulation and reflate the American economy.

However, many areas beyond the U.S. have rallied even more. In fact, stocks in Europe and the emerging markets (EM) have outpaced the S&P 500 since election day (through mid-March), despite initial fears that the new administration’s policies could act as headwinds for those areas. This is significant because many investors have begun to wonder if, or when, the initial post-election exuberance will subside, potentially turning the Trump Rally into the Trump Reality.

Near-Term Pressures on U.S. Stocks

The President’s reflationary policies and the U.S. Federal Reserve’s stated preference to increase interest rates several times this year may work to pressure U.S. stocks, which have for years benefited from the cheap capital and low volatility resulting from accommodative monetary policy.

Add to that the fact that the new administration has had some difficulty articulating exactly how they plan to execute some of their more controversial items in their legislative agenda (e.g., trade renegotiation, tax reform, immigration restrictions, and healthcare reform), and some investors are growing more cautious about the short-term prospects for U.S. stocks. The new administration is still generally considered to be pro-growth and pro-business, but there is some concern that the post-election surge has gone too far, too fast.

Potential for Growth Beyond the U.S.

At the same time, things are looking up for non-U.S. stocks, for region-specific reasons. eurozone gross domestic product growth in 2016 Europe was comparable to that of the U.S., after years of U.S. outperformance. Emerging markets Purchasing Managers’ Index (PMI)1 data have been above consensus expectations, and improving economic and earnings growth have driven EM stocks higher despite the uncertainty around the ultimate effects of the Trump trade reform agenda. In Japan, a weaker yen has helped manufacturers and exporters, and the addition of fiscal stimulus to ongoing monetary measures has supported stocks.

So, regardless of when, if, or how sharply the Trump Reality leads to a pullback in U.S. equities, there is reason to believe other parts of the world are exhibiting potential for earnings growth beyond any outside influences from the new U.S. administration’s “America First” tone.

Regular readers of CIO Insights know that we do not make macroeconomic calls about when markets may or may not rise or fall. We use fundamental, bottom-up research to select individual securities we believe have the potential for earnings acceleration. As we wait to see how the new administration’s policy initiatives play out, uncertainty will continue to cause volatility in markets around the globe. That makes in-depth, company-level research even more important. For that reason, we will stick to our disciplined, bottom-up investment process regardless of how any political agendas unfold.

Indicator of the economic health of the manufacturing sector, based on monthly surveys.

The opinions expressed are those of Keith Creveling, CFA, and are no guarantee of the future performance of any American Century Investments portfolio.

International investing involves special risks, such as political instability and currency fluctuations. For educational use only. This information is not intended to serve as investment advice.