As we approach the 2020 Presidential election, it’s worth remembering what we just endured/enjoyed in financial markets under President Trump.
When listening to Wall Street predictions in 2020, we should remember 2016 and take them with a grain of salt. Donald Trump was cast by analysts as a big headache for financial markets and indeed the shock of his victory caused a sharp overnight slide in financial markets. BUT hours later – after a conciliatory acceptance speech from president-elect Trump markets began to rise. With Trump waiting in the wings to enter the White House, investors enjoyed a Santa rally.
The prospect of corporate tax cuts couple with synchronised global growth while interest rates were still very low on a historical basis created a major bull trend through 2017. Even as Trump started making some more isolationist moves on trade –namely calls to renegotiate NAFTA – the trade agreement between the USA, Canada and Mexico – markets moved upwards. The S&P 500 made 62 new all-time highs. At the same time market volatility stayed near record lows throughout the year with benchmark US indices not dropping more than 3%. In November Donald Trump replaced Janet Yellen as Chair of the Federal Reserve with Jerome Powell and in December the tax cuts were passed, causing a huge Santa rally.
The Santa rally was so big that markets became heavily overbought on most measures, the S&P 500 was so far above its 200-day moving that a correction was due. In January, stock markets collapsed – the S&P 500 lost 40% of the gains made since Election Day. Part of the blame was attributed to Trump’s erratic tweeting style which unnerved various industries- including healthcare companies over drug pricing.
More like the cause was concern that the Fed was moving too fast on rates. The Fed hike three times early in Trump’s Presidency in December ’16, March ’17 and June ’17. Investors had gotten complacent about the low volatility of 2017 and had began to place bets directly on volatility via instruments like VIX futures. The unwind of that low-vol trade helped trigger the early 2018 crash. By September, markets were back to new all-time highs but an escalating US-China trade war and a fourth rate hike saw markets turn lower again and finish the year in the red, for its worst annual performance since the Great Depression- and at one point unwinding all the gains of the Trump Presidency.
Early 2019 saw markets climb a wall of worry about the US/China trade conflict on hopes that a deal would eventually be worked out. That was despite Trump escalating tariffs on China on several occasions– as well as Europe too in some industries. Investors felt at ease buying stocks knowing that the Fed had made a big U-turn on monetary policy – and was now cutting rates after 4 hikes- in what at the time was described by Fed Chair Powell as a pause in the rate hike cycle. Finally by year-end a phase one trade deal was signed between the US and China and the President enjoyed another Santa rally to all-time stock market highs.
The year 2020 started well but eventually as we all know came to be all about the coronavirus pandemic. Originating in China, COVID-19 struck that economy first before spreading to Europe and then to the Americas and the rest of the world. There was a delayed reaction from investors who initially assumed the virus was like other less severe outbreaks before like birdflu and swineflu, in part due to unreliable data from China.
Once the virus took hold in economies with better reporting like Italy, markets saw some of the biggest daily and weekly declines since the 2008 financial crisis and saw the biggest decline into a bear market ever. President Trump was quick to close external borders but the arms of government were just not prepared for the onslaught of the pandemic.
The Fed again stepped into the fold with an unprecedented set of measures- most important of which for market psyche was a new program to buy non investment grade bonds. Not long after the US Congress passed a $2 trillion rescue package called the CARES act that included direct checks to Americans for $1200. Markets have been gliding higher backed by easy money policies ever since – creating an uneasy divergence between the performance of the stock market and the US economy, which went on to lose millions of jobs thanks to government lockdowns.
In September, volatility picked up again on fears the economy is losing steam and government is reluctant to pass another stimulus deal until after the election.