Andrew Hallam
09.11.2020

Why U.S. Stocks Will Disappoint Investors
_

Three days before the U.S. election, I watched a reporter on television interviewing people in Pennsylvania. “I’m voting for Donald Trump,” said one of the women. The reporter asked, “Why?” The woman replied, “He’s been great for my investments.”

The 45th American president says a lot of crazy things.

But when he took credit for the market’s all-time high, many believed the claim. During the first three years of his presidency (before COVID-19 struck) U.S. stocks gained 51.8 percent. And why wouldn’t we give him credit? He’s pro-business, after all. But anyone who thinks he’s a market messiah fell for his verbal shtick.

There are two reasons for that:

1. Trump speaks with a lot of confidence,

2. Most people have short memories, or no benchmark to compare.

The first three years of Barack Obama’s presidency saw U.S. stocks soar 73 percent. That was a much bigger gain than the first three years of Trump. But don’t give Obama credit. Despite what the combed-over Twitter master says, presidents don’t move the markets.

Here’s proof: The United States is a two-party system: Republicans and Democrats. Republicans (and Trump is an example) are pro-business. Democrats, in contrast, have more of a social lean. Republicans, such as Trump and Ronald Reagan, provided tax cuts for corporations and individuals. Republicans such as George W. Bush lowered dividend and income taxes.

In contrast, Democrats typically prefer to raise taxes for the rich and make health care more affordable. This was Bill Clinton, Barack Obama and Joe Biden’s platform. But anyone who thinks pro-business presidents push stocks up has a bad memory. No president deserves credit for how stocks perform. If a link did exist, Republican terms might see the biggest gains.

But that hasn’t been the case.

Presidents don’t move stocks.

According to Forbes, between 1920 and 2016, U.S. stocks averaged a compound annual return of 1.71 percent per year with Republicans in charge. Yep…that’s the pro-business group that’s supposed to push stocks up.

And between 1920 and 2016, U.S. stocks averaged 10.83 percent per year with Democrats in The White House. This doesn’t mean Democrats are better for the markets.

This is pretty random stuff. Presidents don’t move the markets, despite what many people think.

Four-Year Presidential Terms and U.S. Stocks
1929-2020

Sources: Forbes, Bloomberg, Morningstar
* Donald J. Trump’s first 3 years

Instead, stock prices are affected by one thing more than others: market valuations.

And the best measuring stick is Robert Shiller’s CAPE ratio. It measures stock prices, compared to an average of inflation-adjusted past earnings. When a market trades far above its historical CAPE level, the next 10-year return is usually poor. And when stocks trade far below their average CAPE, they usually soar over the next ten years.

That’s one reason stocks suffered during George W. Bush’s presidency. It didn’t matter that the Republican president slashed dividend taxes to a flat 15 percent (from a previous high of 35 percent for high-income earners). Nor did it matter that he dropped income tax rates.

U.S. stocks, as measured by the CAPE ratio, were nosebleed expensive when he took office. They traded at an eye-popping 42 times earnings. Historically, U.S. stocks trade at about 16 times earnings.

That’s why, over Bush’s first four-year term, U.S. stocks dropped 1.69 percent per year. During his second term, they fell 7.34 percent per year (culminating in the 2008 financial crisis, which just added to the bleeding).

U.S. stock prices, compared to business earnings, were low in 2009. That’s the main reason they soared over the next ten years.

And now? U.S. stocks are, once again, in the nosebleed zone. They sport a CAPE ratio of 32.06 times earnings. They’ve only been that high twice: in the late 90s, which resulted in U.S. stocks treading water for about a dozen years (2000-2011) and in 1929, which began the biggest market crash of all time (1929-1931). That doesn’t mean they’ll drop this year or next. They might keep rising for a few more years. But the total predicted ten-year outlook is poor.

In contrast, CAPE ratios for international stocks are not in the nosebleed zone. According to Star Capital, the average CAPE ratio for developed market European shares is currently about 15.8 times earnings. Emerging markets sport an average CAPE ratio of just 16.3 times earnings. Canadian and Australian shares trade at 19.5 and 16.9 times earnings, respectively.

That’s why, over the next ten years, international stocks should leave U.S. stocks behind.

So, here’s what you should do: Maintain a diversified portfolio of global stock and bond market ETFs. Don’t try to speculate. Bonds don’t earn much money. But when global stocks crash (which will likely be led by the United States) bonds will cushion the fall. And based on their far more reasonable price valuations, international stocks shouldn’t fall as far…or they’ll lead the charge back up.

It really won’t matter who pulls strings in the Oval Office.

Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas

Swissquote Bank Europe S.A. accepts no responsibility for the content of this report and makes no warranty as to its accuracy of completeness. This report is not intended to be financial advice, or a recommendation for any investment or investment strategy. The information is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Opinions expressed are those of the author, not Swissquote Bank Europe and Swissquote Bank Europe accepts no liability for any loss caused by the use of this information. This report contains information produced by a third party that has been remunerated by Swissquote Bank Europe.

Please note the value of investments can go down as well as up, and you may not get back all the money that you invest. Past performance is no guarantee of future results.