We thought it would be interesting to look at returns of a few asset classes during Donald Trump’s first presidency. We used election day 2016 to election day 2020 versus inauguration days as markets respond on the event, not on the official ceremony as we have seen historically.
We looked at U.S. small caps (IJR), U.S. large caps (SPY), NAFTA (that became USMCA), equities Canada (XIC) and Mexico (EWW) as well as long Treasuries (TLT) and commodities (DBC).
The returns were all converted to Canadian dollars as I wanted to show the perspective from Canada. All will know that U.S. large caps, led by a hand full of huge companies, have had the strongest returns in recent years.
The difference between the S&P 500 equal weight (RSP) to the market cap weighted index (SPY) was about four per cent annually over this period.
Will history repeat itself? What is similar today than in 2016? For U.S. large caps, the forward based price to earnings (P/E) multiple was 18.5 on election day 2016 – today it’s over 25.
It seems highly unlikely that U.S. equities will return anywhere near the 14 per cent we saw during Trump’s first administration. Small cap stocks (S&P 600) have a similar P/E multiple and are relatively better positioned but are not absolutely cheap.
They will proportionally benefit from an “America first” agenda, which arguably will be stronger this time around. Like 2017, the GOP controls Congress as well, and Americans are giving Trump another shot at it to be sure.
On the bond side, the U.S. long bond (TLT) had a yield of 2.6 per cent in 2016 – today it’s closer to 4.6 per cent. The income portion of long bonds is higher, but so too is inflation so the real return is not significantly higher today.
As we can see, bond yields generally rose in the first two years of the administration. We should expect higher long yields again until the economy starts to slip, and the bond market begins to sniff out a recession.
What complicates the scenario this time around is that the U.S. is already running deficits of about six per cent of gross domestic product (GDP) and the net debt (public share) to GDP is almost 100 per cent.
The forward-looking financing cost of the debt burden is the biggest difference today versus 2016. This will matter at some point for the high equity multiples, but we do not know when.
This time around, there is significantly less fiscal and monetary ability to stimulate. This is probably the biggest difference today versus Trump’s 1.0 agenda. We need to worry about financing debt, deficits and the cost of it along with inflation.
Commodity prices declined on average over Trump’s first administration as measured by the DBC benchmark ETF led by energy markets as supply was the narrative of the day and general cooperation in OPEC plus until the months before COVID-19 created massive distortions.
Gold was up sharply (this probably continues), and beans, corn, wheat and meats were generally flattish.
The forward nature of commodity futures and the inability to actually hold them, other than precious metals, makes it a difficult asset class in general to own.
Over the past decade, commodity ETFs like DBC and COMT, that do a pretty good job mitigating the challenges of forward based assets, have had flat returns over the past decades with strong periods of growth and declines.
We do expect the cost of food to rise as capacity issues creep in and the global population grows while urbanization reduces farmable land.
The tariff fight with the America first agenda is likely to be broader and more encompassing this time around. Creating good U.S. Jobs are at the core of the agenda.
This is, make no mistake, an inflationary policy. This makes assets and companies that would benefit from higher selling prices and lower use of labour big beneficiaries.
Assets like bonds in this scenario perform poorly. Companies will continue to invest in productivity enhancing technologies to maintain and improve margins in this scenario.
To sum it all up, high quality earning companies with low leverage on the balance sheet will likely be the biggest winners. This is known as the quality factor for the smart indexers out there. XSHQ (high quality small caps) might be the biggest winner.
Tune in on Nov. 7, 2028, for the results.
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