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Could the US stock market give the best investment returns of Trump's presidency this year?

By Ashley Glover

Head of Sales Trading, Australia and NZ

For the past 75 years, the third year of each US presidential cycle has, on average, delivered the strongest stock market returns of a US president’s term.

According to Dow Jones data, annual returns in the third year of a US presidency average 13.99%, which is more than double the average annual returns in the first, second or fourth years of a presidential term. In fact, looking at the third year across each of 17 presidential terms, the Dow Jones has fallen just three times. 

DJIA annual returns, 1944 - 2016

In the first two years of Trump’s presidency, the market has already rallied 39%, boosted by tax cuts and pro-business policies; that’s the second-best stock market performance on record (behind President Roosevelt). So what can we expect in Trump’s third year?

While the historical data is compelling, it’s of course not that simple, and we need to take a closer look at some of the other factors that may have an impact on US stock market performance this year.

US/China trade war: a successful deal could spark a broad increase in stock prices for the NASDAQ, however, we are currently witnessing a big change in investor sentiment.

Earlier this year news of continuing trade talks between US and China had provided optimism and buoyed markets.  Recently we have seen talks appear to break down with Trump threatening to impose new tariffs if a deal is not finalised.  If no deal is made me can expect lots of worried investors selling off US stocks, as we’ve seen recently, which could lead to a downturn in performance.

Congress: now that the House is Democrat controlled and the Senate is Republican controlled, any potential big pro-growth bills passed should have bipartisan support, which could be good for the economy and markets.

Strength of US dollar: whilst Trump is trying to “Make America Great Again”, further strengthening of the US dollar could actually mean that US manufacturers struggle to sell their goods overseas. This may potentially undo the positives of Trump’s ambition to bring manufacturing jobs back to the US.

Federal Reserve: the Fed recently took a striking change of direction and announced that they would hold interest rates steady, indicating that we would see no more hikes this year. 

This more dovish stance instantly buoyed markets and sparked investor confidence, with markets turning bullish on the back of the announcement.  In its latest meeting, the Fed resisted pressure from the Trump administration to cut interest rates by as much as 1%.  This has made investors jittery.

On balance, the pros and cons of some of these moments that may move markets appear to be quite evenly matched. While Trump’s third year could present some interesting opportunities for investors in 2019, it will be important to keep a close eye on events. It could be the impact of one really big event that ultimately determines stock market performance over the next 12 months.

One thing is certain though, Trump will definitely keep the markets and traders on their toes.

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