One thing stock markets don't like is uncertainty – and uncertainty is unavoidable in this scenario as the newly elected president, Donald Trump, has no track record. This has implications for all stock market investors, including those who have exposure to the stock market via unit trusts.
Looking at the history of U.S presidential elections reveals some interesting stats. Since 1928, the U.S stock market benchmark, the Standard & Poor's 500, has dropped an average of 2.8%1 in presidential election years that don’t include an incumbent president seeking re-election. In contrast, in years when the sitting president is up for re-election, the S&P 500 has averaged returns of 12.6%2.
Definitely food for thought, although of course, past performance is no guarantee of future performance. Continuity and certainty aren't the only reasons why investors prefer presidents seeking re-election. Another reason they like incumbents is because as they're trying to get re-elected, presidents tend to push economic issues while promoting market-friendly policies.
While traditional thinking is that the Republican party is pro-business and a friend of the economy, this hasn't always played out in the markets. For example, the Dow Jones Industrial Average nearly tripled under Democratic President Franklin Roosevelt (1933-1945), according to a 2014 study in the Journal of Business & Economics Research. On the other hand, Republican George W. Bush saw the Dow Jones drop dramatically3 during his time in office, as his second term coincided with the 2008-2009 financial crisis.
Looking at his economic policy, Trump wants to reduce the income tax brackets from seven to three, with rates ranging from 12% to 33%. Trump also appears to be pro-business and wants to create more jobs in America, with an aggressive plan to slash corporate tax from 39% to 15%.
For most unit trust investors, including those based in Asia, the best way to prepare for the possibility of market volatility following the results of the U.S. elections is to take a long-term perspective. That means staying focused on your personal goals and on broader economic trends rather than on one single political event.
If you can ride out such volatility, the U.S. is one market that investors can't afford to ignore given its size, importance and investment opportunities. Regardless of any short term volatility, the U.S. economy should continue to power ahead thanks to some of the world's most valuable and innovative companies – think Google, Apple, Microsoft and Facebook, to name just a few!
1 BofA/Merrill Lynch Global Research
2 BofA/Merrill Lynch Global Research
3 Journal of Business & Economics Research. "Stock Market, Economic Performance, and Presidential Elections," Second Quarter 2014.
This article is published for information and general circulation only, and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person. All investments carry a risk component. Past performance is not indicative of future performance. You should seek advice from a financial adviser representative before making any investment decision. Opinions expressed herein are subject to change without notice.