Investment Institute
Viewpoint CIO
Manhattan skyline view from Central Park

Go for growth

  • 23 October 2020 (5 min read)

The economy always plays a role in how people vote. Prior to the coronavirus crisis, the economy had performed well under Trump. However, it wasn’t startlingly different to how it had performed under Barack Obama, especially in his second term. What will probably be weighted more in voters’ minds is how the economy has fared this year. That is likely to be a major disadvantage to the incumbent. For investors, the last three elections have been followed by a year of strong equity market gains. There is clearly a path for that outcome to be repeated in 2021. We all just might feel a little more optimistic after what could still be a difficult winter.

Don't worry (1)

Donald Trump came to power at the 2016 US election on a policy programme that promised lower taxes, “fairer” international trade agreements for the United States, bringing home manufacturing jobs and de-regulation. The immediate response to his electoral victory was an increase in bond yields and equity markets. His policies were taken at face value by markets and stronger growth was priced in. This contrasted with the immediate market reaction to Barack Obama’s second term victory when bond yields and equity markets were essentially unchanged between the election date in 2012 and the end of that year and to the market reaction of Obama’s first victory when yields and equity prices fell. In all three cases, the S&P500 posted significant gains in the year ahead (23.5% in 2009, 29.6% in 2013 and 19.4% in 2017). On that basis, don’t worry about the election per se, but look to be fully invested in equities next year. 

Scorecard for DT

Just what has been Donald Trump’s track record in office? The following is a simplistic look at some key economic metrics to perhaps judge whether his Administration was successful in delivering on his promises. We know that taxes were cut, and we know that the US has taken a different approach to international trade and cooperation over the last four years, but what about the economy? Looking at the period between Q1 2017 and Q4 2019 (leaving out the impact of the coronavirus), the US economy had an average quarterly growth rate of 0.62% under Trump compared to 0.60% under the second Obama Administration. That translates to a slightly higher annualised growth rate (2.51% vs 2.44%) under the Trump Administration. It’s not much and there was of course a more challenged global situation in the 2012-2014 period when Europe was going through its debt crisis. Growth has been solid in the context of a structurally lower growth rate since the global financial crisis.

Hard to change things

In terms of the composition of GDP, the share of consumer spending has actually risen a little under Trump. It stood at 69.4% at end 2019 and averaged 1.0% higher during the period. Government spending fell while fixed investment spending was slightly higher as a proportion of overall spending. Arguably then, there was a modest shift away from government to the private sector as a result of Trump’s policies. This has since reversed given the huge fiscal stimulus that has pushed government spending back to 19.5% of GDP compared to 17.3% at the end of last year. Policy rhetoric always gives way to the needs of reality in the end. 

Jobs are a key factor

As for the labour market, the average unemployment rate under Donald Trump to the end of last year was 4.0% compared to 5.9% under Obama-2. Of course, the two periods were at different parts of the economic cycle. Interestingly, the percentage growth in non-farm payrolls under Obama-2 was 7.7% (10.3mn non-farm payroll jobs) compared to 4.5% (6.6mn jobs) under Trump. Of course, for voters what matters is the situation today. The unemployment rate in September 2020 was 7.9%, exactly where it was at the end of the Obama Administration. A key theme of the Trump policy agenda has been the support for US manufacturing through the “America First” agenda. At the end of Obama-2, 8.5% of total payroll jobs were in manufacturing. At the end of 2019, before the virus decimated employment in parts of the services sector, manufacturing employment accounted for 8.46% of the total – barely any change. However, in absolute numbers, manufacturing employment increased by 906,000 between the end of 2016 and end of 2019, compared to an increase of 406,000 during the Obama-2 period. According to the Bureau of Economic Analysis, the value-add of manufacturing in total GDP declined slightly from 11.0% to 10.9% over the Trump period, continuing a trend that goes back well before either Obama or Trump were anywhere close to the White House.

Bad twins

America has often been judged economically on its “twin deficit” problem – its tendency to run large current account deficits and Federal budget deficits. Obviously, the picture on the latter is not pretty at the moment given the pandemic and the response that has been necessary to support the economy from the fiscal authorities. In the first full year of the first Obama Administration, the deficit equalled 9.8% of GDP, the legacy of the global financial crisis. By 2012 it had come down to 6.7% and by the time of the last election it was on track to be just 3.2% of GDP. According to the Congressional Budget Office, the deficit increased to 4.6% of GDP in 2019 and will be well into double digits in 2020. On the external side, the current account balance has remained in deficit to the tune of between 2% and 3% for some years now. If anything, it has got marginally wider under Trump despite his attempts to make trade agreements more favourable to the US.  

Let the voters decide – So the macro record is whatever you want to make of it. On average, growth was close to the long-term rate and job creation was healthy. Yet there was no real change in the structural relative decline of manufacturing employment or value-add. Moreover, there has been no real structural change in America’s global savings/investment balance, meaning that it still tends to have external deficits and a tendency to keep on accumulating higher levels of government debt. Investors have done well under Trump. But to be fair they have done well for many years as a result of central bank policies and looser fiscal policy. That is not going to change. Whoever wins on 3rd November, the Federal Reserve is not going to raise interest rates until inflation has materially picked up. The winning candidate will benefit from the recovery in the US economy which is likely to be given a boost by the deployment of vaccines and anti-viral agents next year. Earnings are going to be higher in 2021 than they were in 2020, which should support equities. Global growth may also be stronger, if the example of China is anything to go by. Chinese growth is almost back to pre-COVID rates and it has effectively got the virus under control. If other countries and regions follow suit in the months ahead, 2021 could be a strong year for global growth.

Don't worry (2)

In Europe, the central bank is likely to do more to support the recovery with economists looking for additional asset purchases, probably under the Pandemic Emergency Purchases Programme. In the UK the speculation is whether the Bank of England will seriously contemplate the move to negative interest rates to support the recovery next year. Everywhere, there is no appetite for austerity and more political provision for continued fiscal support. I am sure that increasingly much of this will morph from the immediate focus on household income and job support to the green recovery. Everywhere will have higher government deficits and borrowing needs but this is not really a problem when interest rates are so low. Treasuries are increasing the terms of their borrowing and why not? Long-term yields on Italian, Spanish, Portuguese and Greek debt are all below 1%. Rates this low mean that governments can have more debt with lower debt servicing costs than was the case in years gone by. Refinancing debt is either going to be an issue well into the future or will be done while central banks are keeping interest rates very low. Of course, the supply of bonds may get very heavy at times and bond markets may struggle to digest this, leading to some volatility in long-term yields now and again. But in the big picture, yields will remain low and that allows fiscal policy a lot of room. I read at least two pieces this week that suggest yield curve control is still a viable option for both the Federal Reserve and the European Central Bank. Until inflation picks up, central banks do not want long-term bond yields to rise materially. If long-term bond yields remain low, real yields will remain low and this is good for equities.

Look to growth

I don’t think 2021 will be a year to be defensive. Core fixed income strategies, at best, will protect capital and will only deliver stronger returns if there is another significant set-back to the global outlook. These, by definition, can’t be predicted, so it is perhaps helpful to always have some duration in a cross-asset portfolio, but this should form part of a multi-sector fixed income allocation that can be flexibly adjusted to where we are in the economic cycle. I also see growth dominating the equity market even with some of the regulatory challenges to technology firms. Thus, a combination of equity exposures tilted to themes like digitalisation, further automation in industrial and distribution activities and clean technology, with higher beta fixed income such as high yield should provide opportunities for good capital growth. Some diversification from flexible fixed income strategies and an exposure to inflation linked bonds should help control the overall level of volatility. However, if you are in for longer-term capital growth and for that to come to a large extent from structural changes and disruptive activity in the evolving economy, then a certain level of volatility should be expected. 

City of light

I have not been able to physically travel to see my colleagues in Paris for months now. However, I enjoyed a virtual night in Paris this week as Manchester United played Paris St. Germain in the Champions League. Of course, I mention it because United won with a stunning goal from Marcus Rashford, MBE. He is a hero this week not just for getting the three points for my team but because of his ongoing work in highlighting the problem of child poverty in the UK and in marshalling charities, companies, individuals and – hopefully – policy makers to do something about it. Marcus has made an impact during the pandemic. In political circles, I take my hat off to Jacinda Ardern as well. Not only has she steered New Zealand though the pandemic more successfully than has been the case in most countries, she has also been rewarded by a landslide election victory giving her Labour Party a majority in the New Zealand parliament. With the most important election in the US coming in just over 10 days from when I write, the Kiwis show us there is a different way to govern.

    Not for Retail distribution

    This document is intended exclusively for Professional, Institutional, Qualified or Wholesale Clients / Investors only, as defined by applicable local laws and regulation. Circulation must be restricted accordingly.

    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.
    All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document. Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.

    Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales, No: 01431068. Registered Office: 22 Bishopsgate, London, EC2N 4BQ. In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries. 

    Back to top