What Trump’s presidency can tell us about the JSE and investor behaviour

Donald Trump sounded a note of optimism over the China-US trade talks, while a report said his top negotiator was set for more talks in Beijing at the end of the month. GETTY IMAGES NORTH AMERICA/AFP/MARK WILSON

Americans who shied away from the stock market after his election because of their political attitudes would have missed out on an exceptional period of returns.

Since Donald Trump won the 2016 presidential election in the US, the S&P 500 has enjoyed a remarkable run of gains. The index is up around 54% in just over three years.

Since November 2016, the month the election was held, the S&P 500 has enjoyed 29 positive months, and only seven negative ones. In nine of those months the gain has been larger than 3%.

This is not an endorsement of Donald Trump or his presidency. It is, however, an important lesson for investors.

White House blues

In a 2012 study entitled Political Climate, Optimism and Investment Decisions, researchers in the US found that people’s attitude towards markets is “dynamically influenced” by their political affiliation, and who is in power.

“The political identity of an individual is an important source of [their] degree of optimism towards the US economy,” the authors noted. “Republicans are less optimistic about the domestic economy when Democrats are in power and, similarly, Democrats grow less optimistic about the economy when Republicans come to power.”

This sentiment then feeds into their investment decisions. The more optimistic someone is about the prospects of the local economy, the more likely they are to invest and trade in the stock market.

The result is that Republicans tend to be more cautious when a Democrat is in the White House, while Democrats are more bullish. The opposite is true when the party in power is reversed.

“Shifts in political climate influence people’s perceptions of risk and reward,” the paper’s authors found. “Investors believe that financial markets are less risky and more undervalued when their own party is in power. This reduced assessment of the riskiness of the market and higher potential reward induces investors whose party is in power to take greater financial risks.”

Trumped

How this relates to the Trump presidency should be obvious. Americans who shied away from the stock market after his election because of their political attitudes – and anecdotally there were many of them – would have missed out on an exceptional period of returns.

What makes this even more complicated is that they also have to decide at what point to get back in.

If their view of Trump is negative, how do they identify the right time to invest again?

At what point does his influence become viewed as benign? Will it change even after he leaves the White House? If he loses the election this year, does that automatically improve the outlook, or is his perceived negative impact still to be felt down the line?

Trouble at home

It shouldn’t be difficult to see the parallels between this US scenario and investor sentiment in South Africa. One only has to read the Moneyweb comments section to see that the current state of the country’s politics is having a material impact on people’s views of the stock market.

These views have only been amplified by the JSE’s weak performance in recent years, which many people have taken as confirmation for their negative outlook.

The only certainty about stock markets, however, is that they are notoriously unpredictable. Negative sentiment about something today can be erased by positive sentiment about something else entirely tomorrow.

For example, the broadly held view in the US before the 2016 election was that a Trump victory would be bad for markets because of the disruption he could cause, particularly to trade. Within weeks of the result being confirmed, however, the S&P 500 was at record highs. It had become evident very quickly that that market could overlook trade uncertainty to focus on the benefits a Trump administration might offer in the form of lower taxes, stimulation spending and deregulation.

There is no reason to believe that any prediction about the JSE is likely to be any more accurate than these predictions that were being made about the US market three years ago. What social science has established beyond any doubt is that our ability to predict anything is awful.

Does anyone really know better?

Investors should therefore consider that there were many times in South Africa over the past 60 years at which the political environment was even more fraught than it is now. Yet the JSE has consistently righted itself.

This is particularly important to consider when so much of the JSE is not even exposed to the South African economy. As much as 70% of the earnings from Top 40 companies comes from outside the country.

So while there is no diminishing South Africa’s problems at the moment, it is worth considering whether, as an investor, you can really predict either their outcome or impact on the market. US democrats who pulled their money from the stock market when Trump was elected have found to their detriment that they could not do either.

What is more important than trying to see into the future, therefore, is to have a defence against both the markets and your own emotions. That comes in the form of a well-diversified portfolio, that is not overly exposed to any single risk – whether that’s Trump or local politics – and a plan that you can stick to through any environment.

Brought to you by Moneyweb

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