Donald Trump: The Economic Magic Behind the Rise of the S&P 500

It is January 20, 2017. Trump takes his first seat in the Oval Office. Donald has shone so far as a businessman. From this moment on, he has only one idea in mind. To show the USA and the World that he can do the same in the White House. The race is on and it will last four years. At least. The S&P 500 is in his sights.

The S&P 500

As a good business leader, the man with the golden hair knows the importance of numbers. He scrutinizes the unemployment rate, the GDP, the dollar... Above all, he monitors the stock market, particularly through the S&P 500. Let us recall that the latter is made up of the 500 largest American capitalizations. On the first steps we currently find: Apple, Microsoft, Amazon, Alphabet (Google) and Facebook. In short, the GAFAM. These American companies are also among the top five in the MSCI World Index in terms of capitalization. Needless to say, they rule the technological, financial and economic world. Not to mention that they shape our lives. And Donald knows this only too well.

Easy money

To grow very quickly, companies need to be able to benefit from almost unlimited and unconditional financial support from their banks. The easier and cheaper they can borrow, the more they can invest, open subsidiaries, recruit, expand into new markets, etc. You don't need an IQ of 130 to understand this. Donald, a good real estate tycoon, has prospered by following these principles. Once he arrived in the White House, he has never stopped demanding loudly from the bank American central bank to lower its rates. The Fed is supposed to be independent. However, since he put Powell there, he always ends up going in his direction.

The easy money policy certainly has its good sides. As we have seen, it allows for rapid business development. It therefore has a very positive impact on the stock market, growth and the unemployment rate. The downside is that it does not encourage companies to question themselves. We are witnessing a kind of headlong rush. Everyone is trying to move as quickly as possible, to take full advantage of the liquidity that is flowing freely, before the source dries up one day.

The GAFAM

The first to benefit are in the growth sectors, namely the technology sector. It is not for nothing that the GAFAM dominate the economic world today. They have become so huge that they dictate the tempo of the financial markets. A large part of the performance of the S&P 500 comes from the technology sector, through the five giants.

The leading American index has risen by more than 55% (including dividends) since Donald Trump took his seat in the Oval Office. Not bad in just over three years. This is especially true given that the market was already very high at the time and the chinese virus has been there. If we stop at this point, we say to ourselves that Donald has succeeded in his bet, indisputably.

S&P 500: capitalization-weighted

When talking about numbers, it is always good to remember how they are calculated. Like most stock indices, the values that make up the S&P 500 are weighted by their capitalization. This means that the variation of the largest of them has a major impact on the entire index. In addition, the S&P only includes the 500 largest companies. It represents only 10% of listed American companies. And much less if we compare it to the entire American economy. Not all companies are listed on the stock exchange. Fortunately.

As an average

An index therefore behaves exactly like an average. It is strongly influenced by extreme values, such as large capitalizations. It provides less information on the behavior of the masses, namely all its other constituents. A fortiori, it is even worse for those that are not included in it, namely small and medium-sized companies, listed or not. In short, the rest of the economy. So, if for some time your results have been worse than the market, it is not necessarily because you are missing the mark. You share the fate of a majority of investors. It is rather the S&P 500 (and the MSCI World Index) that are missing the mark. Particularly at the moment.

S&P 500 ex-tech

If we exclude the technology sector, which is heavily influenced by GAFAM and directly benefits from the Fed's accommodative policy, the picture is significantly different. The graph below shows us, since Trump has been in the White House, the evolution of the S&P 500 (in blue). In orange, you can see that of the same index without the tech sector (in orange). In yellow, it's gold, we'll come back to that later.

What is striking first of all is the result of the non-tech index. It is certainly correct, but it is at a level significantly less brilliant than the overall index. This is particularly true if we look at the performance of the last two years, which has been barely positive. Another worrying aspect is the increase in the volatility, with market troughs that are lower and lower. This observation is valid for both indices (with or without technology). It can obviously be explained by the extreme valuation of the markets. The leverage effect induced by debt, itself created by years of monetary easing, is not unrelated to this either.

Gold

When liquidity is pouring into the market, it can be difficult to determine whether it is companies that are actually creating wealth. Or whether it is just the indirect effect of a devaluation of the currency. If the latter loses value, assets priced in that currency actually gain ground, just by pendulum effect. Gold can serve us in this case as a means of reference, since its reserves in circulation are difficult to expand, unlike money. Still on the graph above, we see that it has progressed strongly during Trump's mandate and that this has also been particularly marked for the last two years. Obviously, the Fed's accommodative policy is not unrelated to this.

The difference in performance between stock indices (with and without technology) and gold gives us a completely different perspective below. This graph can be understood as the performance of the American market valued not in dollars, but in the yellow metal. The S&P 500 has slightly lost value under Trump's mandate. Excluding technology, it has even lost more than 20%. The situation has even been calamitous over the last two years, with a clearly downward trend for both indices. Excluding technology stocks, during this period, the market has even lost almost half of its value compared to gold.

Turning lead into gold?

An alchemist is supposed to be able to transform lead into gold. Donald and his puppet Powell have been playing sorcerer's apprentices with the economy for almost four years. They tinkered with the S&P 500 to make it wait for the firmament. Figuratively speaking, they thus managed to transform lead (companies that had difficulty taking off) into gold (wealth). Literally speaking, however, lead has only continued to sink as always under its own weight. Gold, on the contrary, reminds us that sorcerer's apprentices have never succeeded in creating wealth from nothing.