Last week marked one year since Donald Trump was elected President of the United States, and in that time US equities have reached almost unprecedented highs.
Much has been made of the so-called Trump bump; however, the key question is how much of this positive sentiment can truly be attributed to the policy plans of the new administration?
To fully grasp just how successful the market has been under Trump, it is worth comparing the performance of US equities this year with that of the first years of other presidencies.
Through to 31 October, the S&P 500 is up 20.4 per cent since election day in November 2016. This compares to an average return of 6.6 per cent during the first year of the first term of presidencies since Franklin D Roosevelt in 1932.
In that time, Democratic presidents have witnessed average returns of 13.5 per cent, and Republican presidents have seen average losses of 0.4 per cent.
This means market performance under the current Trump administration has significantly outperformed compared to the first administrations of most of his predecessors.
The only other presidents to have beaten Trump’s performance are George H.W. Bush in 1988 (23.7 per cent), Lyndon Johnson in 1963 (22.4 per cent), John F Kennedy in 1960 (24 per cent) and Franklin D Roosevelt in 1932 (23.8 per cent).
Judging any president by market performance over any given time is clearly an artificial bellwether, just as it is a red herring to judge a president based on his accomplishments during his first 100 days in office.
Nonetheless, such calendar dates have long served as arbitrary measuring sticks for all new presidents.
However, the question remains: how correlated, if at all, is market performance with the person in the Oval Office?
Weathering the storm
What has been surprising about the first year of the Trump administration is that the market has continued to perform so well, despite a host of geopolitical and domestic events.
It seems investors might have ceased paying much attention to day-to-day Washington politics, and have instead shifted focus to the fundamentals of individual companies and economic data.
Since the election, we have undoubtedly witnessed a surge in business, consumer and investor confidence.
But besides this so-called “soft data”, the underlying economic data is also encouraging: corporate earnings are solid, the dollar is strengthening, and job numbers are increasing.
We also have a Federal Reserve bullish enough to begin raising interest rates, and to start unwinding its $4.5 trillion balance sheet – an unprecedented move and one which signals significant long term confidence in the economy, despite factors such as inflation remaining below target.
Even the appointment of a new Fed chair barely moved markets. Given his time already served on the board, the appointment of Jerome Powell represents a degree of continuity from Janet Yellen in terms of maintaining the Fed’s interest rate and balance sheet policies.
Historically, economics and markets have had a larger impact on politics than the other way around.
As much as politicians like to believe they are moving markets, often it is the reverse. The underlying US economic story is undoubtedly positive, regardless of any political administration.
As we look to the future, the big question on many investors’ lips is when will the current bull market come to an end?
Judging by historical precedent, the market is due for a correction.
There are some warning signs that the bull run may be in its final stages, but while pullbacks are possible, there is little evidence to suggest recession is nigh.
Even if we do enter a traditional bear market, it will likely be unrelated to the current administration, unless political risk escalates, or tax reform doesn’t come to fruition.
And, for now, fundamentals are likely to continue to drive sentiment and keep returns buoyant into 2018.