This was written in November
2019. The observations that follow
reflect the market environment of that period.
They are reproduced here because the analysis remains instructive — and
because Donald John Trump has returned to the White House, which means the
question of how to invest through a Trump presidency is no longer
historical. It is current.
The Fundamental
Problem
Markets dislike uncertainty. They can price risk. They cannot price the unknown. The challenge of a Trump presidency is not
that it is uniformly bad for markets — the data does not support that
conclusion. The challenge is that it is
unpredictable in a category that markets have no established mechanism for
pricing: presidential behaviour. Previous
American presidents — regardless of political affiliation — operated within a
broadly consistent framework of institutional constraint, diplomatic
convention, and self-interested calculation that made their actions, if not
always popular, at least foreseeable.
You could model a Reagan presidency.
You could model a Clinton presidency.
You could model a George W. Bush presidency with reasonable confidence
about the range of possible outcomes.
A Trump presidency operates on
different principles. The
decision-making framework is personalised rather than institutional. Policy positions announced on social media at
3 in the morning have the same legal weight as positions developed through the
conventional interagency process over months.
Trade wars are initiated and paused on the basis of negotiating dynamics
that are opaque to the market until they are not. Alliances that were considered foundational
to the post-war international order are renegotiated or abandoned without
notice. The market, which had priced in
decades of institutional continuity, had to reprice for a presidency that
treated every established convention as a starting position for negotiation
rather than a structural constraint.
What the Market
Actually Did
The narrative that a Trump
presidency would be an economic catastrophe was wrong. The S&P 500 rose approximately 70% from
Trump’s election in November 2016 to the pre-COVID peak in February 2020. Corporate tax cuts from the Tax Cuts and Jobs
Act of 2017, reducing the federal corporate tax rate from 35% to 21%, provided
an immediate earnings boost to US-listed companies that the market priced in
enthusiastically. Deregulation across
financial services, energy, and environmental sectors removed compliance costs
and opened revenue opportunities that added further to corporate earnings.
The investor who concluded in
November 2016 that a Trump presidency meant market catastrophe and exited
equities was wrong. The investor who
concluded that specific sectors — defence, energy, domestic manufacturing,
financials — would benefit disproportionately from the specific policy
directions Trump had articulated during the campaign, and positioned
accordingly, did very well.
This is the essential lesson of
investing through political volatility: the question is not whether the
politician is good or bad in the abstract.
The question is what specific policies they will enact, which sectors
those policies benefit, which sectors they harm, and how to position
accordingly.
The Volatility
Premium
The Trump presidency introduced a
specific category of risk that requires a specific response: tweet risk. A single social media post could move
individual stocks, entire sectors, or foreign currency markets within
minutes. Boeing’s stock moved on
comments about Air Force One contract costs.
Pharmaceutical stocks moved on comments about drug pricing. The entire Chinese equity market moved on
tariff announcements. Agricultural
commodity futures moved on trade war developments. The speed and unpredictability of these
movements made conventional risk management — which assumes that major
market-moving information arrives through established channels with some
preparation time — structurally inadequate.
The investor’s response to tweet
risk is not to predict the tweets.
Nobody can. The response is to
position in assets whose fundamental value is sufficiently robust to absorb the
volatility without requiring precise timing.
Quality assets — companies with strong balance sheets, genuine
competitive advantages, earnings that do not depend on favourable government
policy — absorb political volatility better than leveraged, policy-dependent,
or speculative positions. The investor
who holds a leveraged position in a sector specifically targeted by
presidential commentary discovers, rapidly and expensively, that leverage
amplifies tweet risk in both directions.
The Trade War
Dimension
The most significant sustained
market-moving development of the first Trump presidency was the trade conflict
with China. Tariffs escalated from a
specific list of steel and aluminium in early 2018 to a broad application
across hundreds of billions of dollars of Chinese goods by late 2018, producing
direct impacts on US corporate supply chains, input costs, and the earnings of
companies with significant China exposure.
The market’s initial response — a
sharp sell-off in affected sectors — was partially reversed as it became
apparent that the trade war, while genuine, was also a negotiating mechanism
rather than a permanent restructuring of US-China trade relations. The Phase One trade deal signed in January
2020 did not resolve the fundamental tensions but provided enough de-escalation
to calm markets that had been pricing in continued escalation.
For the investor, the trade war
created specific opportunities.
Companies whose supply chains were concentrated in China faced genuine
margin pressure. Companies that had
diversified supply chains — or that could benefit from the redirection of
manufacturing to Vietnam, Indonesia, Malaysia, and other Southeast Asian
economies — saw competitive advantages improve.
The investor who identified this structural shift early and positioned
in the beneficiary economies captured a specific and durable tailwind.
Singapore, as a major trade hub and
financial centre, was particularly well placed to benefit from this
redirection. Capital and manufacturing
activity seeking alternatives to China passed through Singapore’s financial and
logistics infrastructure. The STI
underperformed the S&P 500 over the period, but specific Singapore-listed
companies with Southeast Asian supply chain exposure outperformed the broader
index.
The Dollar and
the Interest Rate Environment
Trump’s relationship with the
Federal Reserve was openly antagonistic — he repeatedly and publicly pressured
Fed Chairman Jerome Hayden Powell to cut rates, criticising the Federal Reserve’s
independence in terms that previous presidents had scrupulously avoided. The Federal Reserve, to its credit,
maintained its independence in practice even while enduring the public
commentary.
The rate environment during the
first Trump presidency moved from a tightening cycle in 2018 — which
contributed to the December 2018 market correction, the worst December
performance since 1931 — to a pivot toward cuts in 2019 as growth concerns
mounted. The three rate cuts in the
second half of 2019 provided the liquidity support that helped markets recover
and advance into 2020 before COVID arrived and changed every assumption
simultaneously.
For the fixed income investor, the
rate environment required continuous reassessment. The investor who positioned for continued
rate rises in 2019 on the basis of 2018's trajectory was wrong by the second
half of the year. Central bank policy
under political pressure — explicit or implicit — does not always follow the
trajectory that economic fundamentals alone would suggest.
The Sectors
That Won
Three sectors outperformed
consistently through the first Trump presidency and would likely do so again
under similar policy conditions.
Defence was the clearest beneficiary.
Trump’s commitment to NATO allies paying more for their own
defence, his expansion of US defence spending, and his general approach to
geopolitics as a competitive rather than cooperative domain created sustained demand
for defence equipment and services.
Lockheed Martin, Raytheon, and Boeing's defence division all performed
strongly.
Energy benefitted from systematic deregulation. The withdrawal from the Paris Agreement, the
expansion of offshore drilling licences, the approval of pipeline projects that
had been blocked by the previous administration, and the general policy
orientation toward fossil fuel production over renewable transition all
provided commercial support for the energy sector.
Domestic
manufacturing and industrials benefitted
from the combination of corporate tax cuts, infrastructure spending rhetoric —
which was more rhetoric than action in the first term but supported sentiment —
and tariffs that increased the relative cost of imported goods and improved the
competitive position of domestic producers.
The Sectors
That Did Not
Renewable
energy underperformed the market
consistently as the policy environment shifted away from the incentive
frameworks that had driven its growth under the previous administration.
Multinational
consumer goods companies with
significant China exposure — including major brands in apparel, electronics,
and retail — faced sustained margin pressure from supply chain disruption and
tariff costs that could not always be passed to consumers.
Healthcare was volatile throughout — Trump’s commentary on drug pricing
created specific downside risk for pharmaceutical companies, though the sector’s
fundamental demand drivers meant the underperformance was contained rather than
catastrophic.
The Investment
Principles That Apply
Several principles apply to
investing through any Trump presidency — and, more broadly, through any period
of elevated political volatility.
Position in quality. Companies with strong balance sheets, genuine
competitive advantages, and diversified revenue streams absorb political
volatility better than leveraged, concentrated, or policy-dependent positions. The volatility creates opportunities to
acquire quality at temporarily depressed prices. The investor with cash reserves and
discipline to deploy them during the sell-offs that tweet risk produces is
structurally advantaged.
Diversify geographically. A Trump presidency affects the US market most
directly, but its effects ripple through global trade, currency markets, and
diplomatic relationships in ways that create both risks and opportunities in
non-US markets. The Southeast Asian
economies that benefit from supply chain redirection, the Asian financial
centres that attract capital seeking alternatives to US-denominated assets, and
the commodity-exporting economies that benefit from infrastructure spending and
defence procurement — all of these provide portfolio diversification that
reduces the concentration of tweet risk in any single position.
Maintain liquidity. The sell-offs that political volatility
produces are buying opportunities for the investor who has cash to deploy. The investor who is fully invested at the
beginning of a volatile period has no capacity to take advantage of the dislocations
the volatility creates. A
higher-than-average cash balance is not a failure of conviction. It is an option on future opportunity.
Ignore the noise. The 24-hour news cycle during a Trump
presidency produces a continuous stream of commentary, outrage, analysis, and
counter-analysis that creates the impression of constant crisis. Most of it is irrelevant to long-term
investment value. The investor who makes
decisions based on the tone of the morning’s news coverage is making decisions
on the wrong variable. The investor who
makes decisions based on fundamental valuation, earnings trajectory, and the
structural impact of durable policy changes is making decisions on the right
ones.
The Conclusion
A Trump presidency is
navigable. It is not predictable in the
conventional sense. It is volatile in
ways that create both risk and opportunity.
The investor who positions defensively, maintains quality, diversifies
geographically, holds liquidity, and ignores the noise will find that the
volatility creates more opportunity than it destroys — provided the fundamental
discipline of long-term thinking is maintained through the periods when
short-term noise makes that discipline most difficult. The market survived the first Trump
presidency. It will survive the
second. The question, as always, is not
survival. It is positioning.
Terence Nunis |
Executive Chairman, Equinox Zenith | Author, The 1% Playbook: The
Billionaire Cheat Code
