Donald Trump suffers a midterms setback, US stocks come back down to earth. Where do investors go next?
- Nicholas Spiro says Wall Street is still reeling from the October sell-off, but can’t expect more financial stimulus from the Trump administration
- If there is convergence across global equities, it is likely to be the wrong kind, with US stocks falling back to rejoin the pack
As recently as September 20, Wall Street’s leading S&P 500 stock index had delivered a year-to-date return of nearly 10 per cent. Its tech-laden counterpart, the Nasdaq Composite index, had performed even better, rising more than 16 per cent since the start of this year as the popular technology sector continued to turbocharge a rally in American stocks.
The so-called America First trade, although under pressure from high valuations and rising interest rates, was far and away the best bet for equity investors in increasingly volatile global markets.
Following a period in which the buoyant US equity market decoupled from its slumping peers, the gap between US stocks and those in the rest of the world is starting to narrow. This convergence, moreover, looks set to gain momentum in the coming months.
The Democrats’ victory in the House, which allows them to probe criminal allegations against the Trump administration, will harden the president’s combative stance and inject more vigour into his nationalist agenda. As Pimco, an asset manager, rightly noted in a blog last week, “trade policy risk is likely to continue unabated no matter the outcome” of the elections, particularly since most Democrats support Trump’s tough approach towards China.
And even if the performance gap between richly priced US equities and cheaper emerging-market stocks narrows in the coming months, it is unlikely to be due to the outperformance of non-US equities.
If there is convergence across global equities, it is likely to be the wrong kind of convergence, with US stocks falling back to the pack amid increasing market volatility.
The growing number of vulnerabilities, particularly those associated with the withdrawal of monetary stimulus by the leading central banks, is punishing all major asset classes. Only a handful, which currently include the US dollar and the US’ main stock indices, have delivered positive returns this year – and in single digits at that.
10th anniversary of the financial crisis
According to a JPMorgan report on October 26, at the height of last month’s sell-off, just 20 per cent of asset classes have delivered positive returns in 2018, “a share that has never been so low outside of 1970s stagflation episodes and the global financial crisis”.
With the America First trade now in jeopardy, investors have few places to take refuge.
Nicholas Spiro is a partner at Lauressa Advisory