Despite investors’ concern over the pre-US election grandstanding from the Republican Party’s presidential nominee, political rhetoric and scaremongering have never been a driver of long-term equity returns, as Giles Parkinson explains.


Donald Trump is the last man standing in the race to secure the Republican Party’s presidential nomination for the US Election in November. Taken at face value, the implications of a Trump presidency on US stocks appear to be negative. With his infamous ‘Great Wall’ plans and talk of repealing ‘horrible’ free trade deals – neither of which would be good for business – he can be positioned within a rising trend towards protectionism and populism seen in Europe. However, there are reasons to remain sanguine.

First and foremost, Trump has significant ground to make up with voters if he is to become the country’s 45th president at all. He may have borrowed the slogan ‘Make America Great Again!’ from Ronald Reagan, but there is little evidence to suggest he will replicate Reagan’s landslide victories. Trump consistently polls behind Clinton, who bookmakers also make a heavy favourite to win the election.

Trump will have to moderate his rhetoric if he is to have any hope of swinging opinion in his favour. A party outsider needs to shout the wildest to rally the base; a head-to-head presidential candidate needs to speak to the political centre.

Even if Trump is able to defy the odds and win the election without abandoning his more extreme policies, it seems improbable he would be able to implement them. It could reasonably be argued that the American president is one of the most visible yet least powerful domestic leaders in the world. By separating the executive, legislative and judicial powers, the Founding Fathers designed a system of checks and balances to thwart the president of the republic drifting into an elected monarchy.

All federal legislation must pass through Congress. The president cannot compel action or control the outcome. The president can veto legislation, but Congress can override the veto. And even then, the Supreme Court might strike it down. Trump is not the first – and certainly won’t be the last – presidential candidate to make grand claims on the campaign trail without following through once in office. For example, although Obamacare got through Congress, the final legislation was far from the bill Obama wanted. In the process, he had to bargain away most of the rest of his legislative agenda just to get this reform through.

Looking beyond the election result, America is in a relatively stronger position than many of its developed world peers, particularly Japan and the euro zone. It is one of the most capitalist nations in terms of national psyche and regulation; the demographic outlook is superior thanks to the proven ability to attract and assimilate immigrants; it has been bestowed with a wealth of natural resources; the banking system was recapitalised quickly after the global financial crisis; it dominates the rankings of world-class elite universities and English is the common language of international science and culture. The result is a country which produces many world-class and innovative companies. America’s ingrained advantages will outlast any single presidency.

Finally, it should be recognised that the stock market is not necessarily the economy. Foreign sales account for 40% of S&P 500 firms’ revenues, for example. Moreover, the relationship between domestic economic growth and national stock market returns is weak at best*. History tells us that equities tend only to fall and stay down for a long time if a country’s capital stock is destroyed by war or, worse, confiscated in revolution. Geographically, America is secure, and militarily, the country can afford as many aircraft carriers as the rest of the world put together.

Should share prices decline on any election headlines, it could present an excellent opportunity to pick-up proven winners at a discount. Steadily accumulating a diversified collection of well-run businesses will continue to be a prudent approach to growing capital over time.

Important Information

Unless stated otherwise, any sources and opinions expressed are those of Aviva Investors Global Services Limited (Aviva Investors) as at 17th May 2016. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Past performance is not a guide to future returns. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested.

Issued by Aviva Investors Global Services Limited, Fund registered in England No. 1151805.  Registered Office: St. Helen’s, 1 Undershaft, London EC3P 3DQ.  Authorised and regulated by the Financial Conduct Authority and a member of the Investment Association.  Contact us at Aviva Investors Global Services Limited, St. Helen’s, 1 Undershaft, London EC3P 3DQ.

Approved for Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the UK.