By Phillip Brzenk
The results of the 2016 U.S. presidential election, which were widely considered surprising, had many market participants believing that the proposed economic policies of Donald Trump, "Trumponomics," would be swiftly implemented. During his campaign run, Trump called for tax cuts, reduced corporate regulations, increased foreign trade tariffs, and increased defense and infrastructure spending.1 Initial expectations held by many were that his policies would be a boon to the overall U.S. economy in the short term. In particular, companies and industries most closely tied to the U.S. economy and economic proposals would reap the majority of the benefits.2,3
Given that we are at the one-year mark since the election, we wanted to see how things have played out since. This will be the first installment in a series of posts that reviews performance since the 2016 U.S. election.
If the hypothesis is that companies most tied to the U.S. economy would benefit the most under the new presidential regime, we can test as such by forming two portfolios based on geographic revenue data. The S&P 500 Focused U.S Revenue Exposure Index (Domestic Revenue Portfolio) comprises the top 25% of companies in the S&P 500 that receive the highest proportion of their total revenue from the U.S., while the S&P 500 Focused Foreign Revenue Exposure Index (Foreign Revenue Portfolio) holds the top 25% of companies most exposed to foreign economies. With the creation of these portfolios, we are able to test the hypothesis by tracking their performance since the election relative to the S&P 500.
As projected, for the immediate months following the election, the Domestic Revenue Portfolio outperformed the Foreign Revenue Portfolio and the S&P 500 by a meaningful margin. But as 2017 approached spring, a reversal occurred, and the foreign portfolio began to outperform the domestic portfolio - a trend that continued through the end of October 2017. As of October 31, 2017, the foreign portfolio had an excess return of 7.14% versus the S&P 500, while the domestic portfolio underperformed the S&P 500 by 7.31% - a difference of 14.45%.
To discover why this occurred, we first look at the potential impact that currency movements had on the portfolios. Intuition would say that a portfolio focused on companies with revenues coming from the U.S. would have little direct, or indirect, exposure to foreign currency movements. Conversely, a portfolio focused on companies with foreign revenues would be exposed to foreign currency movements, as the companies translate foreign currency revenues back to USD.
The U.S. Dollar Index, which is designed to track the relative value of the U.S. dollar to a basket of other major world currencies, is overlaid on the performance chart (plotted to the secondary axis). Conceivably reflecting the bullish views of the expected future growth of the U.S. economy, the index rose over 4% by the end of 2016. By early 2017, the U.S. Dollar Index started to decline and trend downward through the end of October, in similar magnitude as the domestic portfolio. The foreign portfolio saw relative performance versus the S&P 500 and the domestic portfolio rise as the U.S. dollar dropped in value. The results, therefore, potentially indicate a positive relationship between the domestic portfolio and U.S. Dollar Index and a negative relationship between the foreign portfolio and the U.S. Dollar Index.
To further investigate the relationship between currency movements and portfolio performance, in the next blog we will look at the overall macroeconomic risks of the portfolios.
1 Donald Trump Adopts G.O.P. Tax Cuts, but Balks at Trade Pacts, NY Times, August 8, 2016
3 Why Stock Markets, Initially Shaken, Went Up After Trump’s Victory, NY Times, November 8, 2016