Earlier in the year, you may have seen a headline at some point pertaining to the so called “Trump Rally” for the US and global stock market. Post election and through early 2017, there was this narrative that Trump had ignited a stock rally in anticipation of tax cuts, infrastructure spending, and deregulation. In early February, MarketWatch posted “Stock market rallies to records as Trump teases tax-policy announcement“. The article noted “Trump’s pledge to cut taxes are expected to have a stimulative effects on asset values”.
This narrative has faded among investors as the White House has struggled to pass any major legislation since Trump took office. However, even as uncertainty swirls in Washington, stocks have continued to rally in 2017. Trump himself has continuously touted the success of the stock market via Twitter.
While many investors have discredited Trump's influence on stocks, several continue to attribute this bull run to Donald Trump. Even after being fired by the Trump Administration, Anthony Scaramucci retweeted an Investor's Business Daily commentary post titled "Yes, President Trump Is Making America Great Again". In the post, Gary Shapiro wrote
Talk of inflation has been swirling for some time amid all the stimulus that's been pouring into the market and the soaring debt levels in the U.S. The Federal Reserve has said that any inflation that does occur will be temporary, but one hedge fund macro trader says there are plenty of reasons not to Read More
"The stock market continues to break records. The record-high Nasdaq is up 18% this year. The S&P 500's Tech Sector index hit a record high not seen since its bubble in 2000. And the Dow Jones industrial average continues to enjoy new highs."
Global Stock Market Belies The Narrative
The idea that stocks have rallied partially due to expectations of lower taxes is simply untrue. Not only is there a lack of positive correlation between tax cut expectations and stocks, there is actually a strong negative correlation between the two thus far. Going back to late January, the correlation coefficient between tax cut expectations and the S&P 500 is -0.83, essentially burying the notion that anticipation of tax reform has been driving stocks.
The S&P 500 is up 7.64% since Donald Trump's inauguration. During the exact same time frame last year, the S&P was up 16.40% - more than double Trump's gains. This goes unnoticed as the administration continues to use the "all-time high" claim when connecting the stock market to Trump. With the Dow having recorded an impressive 35 record closes so far in 2017, it is important to note the success of stocks outside of the US.
Global Stock Market Rally
Part of the S&P 500's success in 2017 has been due to the strength of the global economy rather than just the United States. Nearly 40% of profits of S&P 500 companies come from abroad. With a lower US dollar, we have seen increased demand for US goods from abroad, lifting the profits of these companies.
Future earnings are generally what drive stock prices. While the S&P 500 has reported double digit earnings growth in the first two quarters of 2017, companies abroad are also seeing stock rallies due to strong earnings.
The chart above shows most of the global stock market outperforming that of the US so far this year. Using the performance of various ETFs, we can see each international asset beating both the S&P 500 and the Russell 2000. Even "low-growth" Japan is beating American stocks in 2017. An interesting observation is the ETF, VEU (Vanguard All-World ex-US), which seeks to represent the global stock market excluding the United States. VEU is up 17.53% YTD, exceeding the gains of the Dow, the S&P, and the Russell (trailing the NASDAQ however). Additionally, VEU is also outperforming Vanguard's Total World Stock ETF (VT), which includes US equities. It's almost as if US stocks have been a drag on the global stock market.
"With the drop in the US dollar and the outperformance of international stocks, the US stock market is losing share versus the rest of the world even though it’s in rally mode. While the S&P 500 is up 10% year-to-date, the United States’ stock market cap as a percentage of total world stock market cap has dropped from 37.70% all the way down to 35% so far this year...So even though the President has been touting the stock market’s gain lately, when you look closely, it has actually lost share versus the rest of the world since his victory."
Strong Global Trade
The strength of the global economy can partially be seen in world trade. World trade in May grew at its fastest pace since 2011, as indicators such as air freight traffic and number of containers passing through major ports have been surging. Strong global manufacturing PMI also signals health in the international market. These boosts in global trade just so happen to coincide with the stock rallies mentioned above.
Source: Capital Economics
One can only expect Trump to continue to take credit for stock's success for as long as this bull market continues. However, if you find yourself immersed in the topic at your next cocktail party, it's probably best you reference economics rather than your politics.