Client Update - 30th October 2020
The US elections are almost upon us. The economy always plays a role in how people vote. Prior to the coronavirus crisis, the economy had performed well under Trump. However, it was not startlingly different to how it had performed under Barack Obama, especially in his second term. What will probably be weighted more in voters’ minds is how the economy has fared this year. That is likely to be a major disadvantage to the incumbent. For investors, the last three elections have been followed by a year of strong equity market gains. There is clearly a path for that outcome to be repeated in 2021. We all just might feel a little more optimistic after what could still be a difficult winter.
Donald Trump came to power at the 2016 US election on a policy programme that promised lower taxes, “fairer” international trade agreements for the United States, bringing home manufacturing jobs and de-regulation. The immediate response to his electoral victory was an increase in bond yields and equity markets. His policies were taken at face value by markets and stronger growth was priced in. This contrasted with the immediate market reaction to Barack Obama’s second term victory when bond yields and equity markets were essentially unchanged between the election date in 2012 and the end of that year and to the market reaction of Obama’s first victory when yields and equity prices fell. In all three cases, the S&P500 posted significant gains in the year ahead (23.5% in 2009, 29.6% in 2013 and 19.4% in 2017). On that basis, do not worry about the election per se, and do not run from equities in the midst of this COVID winter.
Just what has been Donald Trump’s track record in office? The following is a simplistic look at some key economic metrics to perhaps judge whether his administration was successful in delivering on his promises. We know that taxes were cut, and we know that the US has taken a different approach to international trade and cooperation over the last four years, but what about the economy? Looking at the period between Q1 2017 and Q4 2019 (leaving out the impact of the coronavirus), the US economy had an average quarterly growth rate of 0.62% under Trump compared to 0.60% under the second Obama Administration. That translates to a slightly higher annualised growth rate (2.51% vs 2.44%) under the Trump Administration. It is not much and there was of course a more challenged global situation in the 2012-2014 period when Europe was going through its debt crisis. Growth has been solid in the context of a structurally lower growth rate since the global financial crisis.
In terms of the composition of GDP, the share of consumer spending has actually risen a little under Trump. It stood at 69.4% at the end of 2019 and averaged 1.0% higher during the period. Government spending fell while fixed investment spending was slightly higher as a proportion of overall spending. Arguably then, there was a modest shift away from government to the private sector as a result of Trump’s policies. This has since reversed given the huge fiscal stimulus that has pushed government spending back to 19.5% of GDP compared to 17.3% at the end of last year. Policy rhetoric always gives way to the needs of reality in the end.
Jobs are a key factor. As for the labour market, the average unemployment rate under Donald Trump to the end of last year was 4.0% compared to 5.9% under Obama-2. Of course, the two periods were at different parts of the economic cycle. Interestingly, the percentage growth in non-farm payrolls under Obama-2 was 7.7% (10.3mn non-farm payroll jobs) compared to 4.5% (6.6mn jobs) under Trump. Of course, for voters what matters is the situation today. The unemployment rate in September 2020 was 7.9%, exactly where it was at the end of the Obama Administration. A key theme of the Trump policy agenda has been the support for US manufacturing through the “America First” agenda. At the end of Obama-2, 8.5% of total payroll jobs were in manufacturing. At the end of 2019, before the virus decimated employment in parts of the services sector, manufacturing employment accounted for 8.46% of the total – barely any change.
America has often been judged economically on its “twin deficit” problem – its tendency to run large current account deficits and Federal budget deficits. Obviously, the picture on the latter is not pretty at the moment given the pandemic and the response that has been necessary to support the economy from the fiscal authorities. In the first full year of the first Obama Administration, the deficit equalled 9.8% of GDP, the legacy of the global financial crisis. By 2012 it had come down to 6.7% and by the time of the last election it was on track to be just 3.2% of GDP. According to the Congressional Budget Office, the deficit increased to 4.6% of GDP in 2019 and will be well into double digits in 2020.
So, the macro record is whatever you want to make of it. On average, growth was close to the long-term rate and job creation was healthy. Yet there was no real change in the structural relative decline of manufacturing employment or value-add. Moreover, there has been no real structural change in America’s global savings/investment balance, meaning that it still tends to have external deficits and a tendency to keep on accumulating higher levels of government debt. Investors have done well under Trump. But to be fair they have done well for many years as a result of central bank policies and looser fiscal policy. That is not going to change. Whoever wins on 3rd November, the Federal Reserve is not going to raise interest rates until inflation has materially picked up. The winning candidate will benefit from the recovery in the US economy which is likely to be given a boost by the deployment of vaccines and anti-viral agents next year. Earnings are going to be higher in 2021 than they were in 2020, which should support equities. Global growth may also be stronger, if the example of China is anything to go by. Chinese growth is almost back to pre-COVID rates and it has effectively got the virus under control. If other countries and regions follow suit in the months ahead, 2021 could be a strong year for global growth.