Navigating Uncertainty: Global Markets and Economic Outlook at the 8th Annual Private Wealth UK Autumn Forum

Written by Josh Matthews, HBA

Josh Matthews, Co-Founder and Senior Wealth Manager of MASECO Private Wealth, recently had the pleasure of moderating the panel discussion, The Next 12 Months at a Glance, at the 8th Annual Private Wealth UK Autumn Forum. The panel included Kevin Gardiner, Global Investment Strategist at Rothschild & Co Wealth Management, Edward Smith, Co-Chief Investment Officer at Rathbones Group, Graham Bishop, Chief Investment Officer at Handelsbanken Wealth & Asset Management, and Jonathan Bell, Partner at Stanhope Capital.

The discussion explored the potential outlook for the US & Global stock markets and economies under a Trump presidency, particularly the implications of increasing tariffs and deporting migrant workers on inflation. These policies have heightened concerns about inflation, and bond yields in the US have risen recently. The general consensus was that the US economy is currently in very good shape, with a strong labour market and that Trump is inheriting a relatively favourable economic scenario. The US stock market is near an all-time high, with relatively high valuations, indicating low investor risk aversion. However, this also suggests that future expected returns for US equities may be below average.  The 2017 research paper Political Cycles and Stock Returns, Lubos Pastor & Pietro Verones goes into detail:

“Stock market returns in the United States exhibit a striking pattern: they are much higher under Democratic presidents than under Republican ones. From 1927 to 2015, the average excess market return [above the risk-free rate of return] under Democratic presidents is 10.7% per year, whereas under Republican presidents, it is only −0.2% per year. The difference, almost 11% per year, is highly significant both economically and statistically. This fact is well known, having been carefully documented by Santa-Clara and Valkanov (2003)…When risk aversion is high, as during economic crises, voters are more likely to elect a Democratic president because they demand more social insurance. When risk aversion is low, voters are more likely to elect a Republican because they want to take more business risk. Therefore, risk aversion is higher under Democrats, resulting in a higher equity risk premium, and thus a higher average return. In our model, the high-risk premium is not caused by the Democratic presidency; instead, both the risk premium and the Democratic presidency are caused by high risk aversion.”

That being said under a Trump presidency the US stock market appreciated 63%, similar to Biden 61.5% (so far), Obama 81.4% and Clinton 79.2% during their first four years: [1]

Figure 1: [2]

This is typical as Republicans are, in most cases, voted into power when the economy is strong (often due to Democratic policies) and Democrats are often voted into power when the economy is weak (sometimes due to crises)[3].

In the UK and Europe, the situation is different. Economic growth is less robust, and there is uncertainty about the implications of a Trump presidency for the political and economic landscape in these regions. While it is anticipated that both GDP and the euro will be affected, there was little agreement on the direction of these changes. Overall, the panel emphasised the importance of diversifying portfolios and focusing on the less expensive segments of the equity market, which are expected to deliver higher returns compared to growth stocks.

These observations should not be viewed as a market timing strategy, and a diversified well-balanced portfolio should continue to be a good investment strategy for most investors during these uncertain times.

References

[1] The Shiller PE (CAPE) Ratio: Current Market Valuations – Lyn Alden

[2] https://www.macrotrends.net/2482/sp500-performance-by-president

[3] Political Cycles and Stock Returns, Lubos Pastor & Pietro Verones

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