A Year of Trump How does the US compare to Europe

It is one year since Donald Trump officially won the US Presidency. He is arguably the most controversial President of all time, but what is his impact on financial markets? Is it right for him to take the credit for US stocks hitting record highs? Is an unpredictable head of the White House the reason why volatility has been so low even though there hasn’t been any progress on some of Trump’s major policy promises from a year ago?

To analyse this further we have decided to compare and contrast the performance of US assets over the last year with European assets as the Eurozone has also faced multiple elections and it has a similar sized economy to the US. We will look at the relative performance of their stock markets, finance sectors, GDP rates and currencies to see if there really is such thing as a Trump effect.

1, Eurostoxx 600 and the Dow Jones:

Up until June these two indices were following each other closely. However, in the second half of the year the Dow has surged ahead of the Eurostoxx 600 index. This suggests that the easing of Europe’s political risk wasn’t enough to boost the European stock market and the US stock market’s continued outperformance compared to Europe emphasize how expectations remain high that Trump will be good news for the US economy and the US corporate sector. However, it could also be down to the stunning performance of the US tech sector, which is not driven by Trump, which has a much larger sector in the US market compared to Europe. Also, Boeing, which was a company lambasted by Trump on Twitter a year ago, has actually surged in recent months and is a big gainer on the Dow, suggesting that the President’s impact on the US stock market may not be as great as he would like it to be.

Source: City Index and Bloomberg

2, The US and Eurozone financial sectors:

As you can see, the Eurostoxx banking index and the S&P 500 banks index have tracked each other closely for most of this year. Considering the Eurozone has not had a major shake-up of its banking rules compared to the US, where there is hope for a cut to the corporate tax rate and a re-jig of financial market regulation, one could argue that Trump’s shadow can be seen in the performance of global banking stocks. This is backed up by the recent dip in banking stocks as doubts about Trump’s tax cuts start to creep into investors’ minds. This suggests that if Trump can’t deliver on his plans to cut corporate tax rates and roll back on financial sector regulation then global banking stocks could take a hit in the coming months.

Source: City Index and Bloomberg

3, GDP

When it comes to growth rates the US is still outpacing Europe, the latest US GDP reading for Q3 showed a 3% annualised increase, while Europe’s economy is expected to expand by 2.5% over the same time period. Europe’s growth is definitely playing catch up to the US rate, however Q4 will be important: can the US economy maintain its momentum in  the face of political stalemate in the US and rate rises from the Fed, and can the Eurozone continue to catch up to its rival? US economic growth is something that Trump claims credit for, but as you can see US GDP has been steadily climbing since 2012, so this looks more like a continuation of a trend rather than a single handed effort by the US President.

Source: City Index and Bloomberg

4, The currency

As you can see in the chart below, this is one area where Donald Trump has been successful. He has talked down the US dollar on numerous occasions and it seems to have worked. This year the euro has massively outperformed the dollar. This also highlights the ECB’s inability to stem euro appreciation while the dollar remains in the doldrums. Interestingly, the euro started to outpace gains in the dollar around May/ June, which corresponds with the peak in European stocks. Thus, dollar weakness, which is partly driven by Trump’s desire for a weaker greenback, is one reason why the US stock market may have outperformed European markets.

Source: City Index and Bloomberg

To conclude, love him or loath him, Trump has definitely had an impact on the markets, in particularly on the strong performance of banking stocks and dollar under performance. The Trump effect on US stocks is based on perception that he will enact tax reform and scrap financial market legislation. This hasn’t happened in his first year in office, the question now is can he deliver in 2018 and beyond. If the markets start to doubt Trump’s effectiveness as a corporate advocate then we could see US markets plunge as confidence in the Trump premium starts to wane.