Ah, the market. We hear this term all the time. And we’re rarely specific about “the market” we’re referring to. After all, what “market” are we talking about when we hear that the market is up or down? Your local apple market? The stock market? The bond market? What stock market? What bond market? One thing we keep hearing in recent weeks is that “the market” really likes Donald Trump’s policy ideas. Which is true, if you’re referring only to the US stock market. If, like most other people, you reside in our global economy comprised of stocks AND bonds then “the market” is actually down since Trump won. That’s right, “the market” doesn’t like Trump’s policies as much as this view has been advertised.
As I’ve detailed in the past, the one true representation of “the market” is the Global Financial Asset Portfolio.¹ This is the portfolio of all global outstanding FINANCIAL assets. It is the only relevant benchmark for the global financial markets because it is the only aggregate portfolio that correctly reflects the market of financial assets without any home bias. And this portfolio is down about 1% since the US Presidential election.²
This is primarily the result of a large bond sell-off and a foreign stock correction mostly concentrated in emerging markets. But when viewed through an aggregate lens the world basically woke up, saw the Trump win, said “eh” and went about its business. Notice that I don’t say the world is worried about Trump. Nor did I say that the world is excited about Trump. A 1% sell-off in the GFAP is not much of a move so I wouldn’t read into it too much. But in the aggregate we are no better or worse off than the day before Trump won.
But Cullen, you say, what about the domestic economy?? Surely the USA loves what it’s hearing, right? Well, not really. The aggregate US financial markets (both stocks and bonds) are up about 0.4% since the election. So there’s a marginally better performance there because US stocks have responded more positively, but I wouldn’t draw too many conclusions from 0.4%. In my view the only real conclusion you can draw from financial market’s move post-Trump is that they’re very worried about a protectionist Trump. This can be clearly seen in many foreign currencies and especially emerging markets where currencies, stocks AND bonds have all taken a hit. But aside from some rather extreme moves in some emerging market economies I would be hesitant to draw too many conclusions about how the global economy views the Trump win.
¹ – See here for a simple 4 fund GFAP.
² – The simple 4 fund portfolio is a blend of local currency and USD because the foreign bond position is a currency hedge position.