The US Election and Future Investment Returns

Most global investors have a large allocation to US investments. It’s almost unavoidable given the depth and breadth of US capital markets and the extent to which the US dominates many conventional indexes.

So, with the US election just over a month away and each candidate promising to enact policies that will lead to a stronger US economy, it is natural for many investors to be thinking about whether broad US market investment returns in the next administration are likely to turn on the results of the upcoming election.

If the past 40 years are instructive, it isn’t worth trying to predict the GDP growth rate or broad US market investment returns of the next Presidential administration. These are much more likely to be driven by forces and events beyond the control of a President.

That said, there are lots of reasons to believe that, irrespective of the election outcome, the US will remain one of the world’s most dynamic economies with a disproportionately large number of investment opportunities and strong long-term investment potential. ?

The Inevitability of Large US Allocations

Most global investors have large allocations to US investments, and this has been a positive contributor to their long-term investment returns.

The $16 Trillion US economy represents approximately 16% of global GDP (on a purchasing power adjusted basis). But the US investment opportunity set is disproportionately large, relative to the size of its economy. About 62% of the widely used All Country World Index (ACWI) public equity index consists of US companies; and 45% of bonds issued globally are US bonds.

What cannot be adequately captured in a couple of statistics is the incredible dynamism of the US economy and its capital markets. The top 10 companies in the ACWI index are all US companies. The New York Stock Exchange and Nasdaq are each many times bigger than the next biggest stock exchanges (Euronext, Tokyo and Shanghai). The US is the epicentre of the ETF, hedge fund, private equity, private credit and venture capital industries. And the US regularly produces companies that commercialize game changing technologies on a global scale – Microsoft, Google and Apple.

In addition, the US dollar tends to act as a safe a harbour during times of global market distress.?This means that foreign investors in unhedged US dollar denominated assets get a certain measure of protection against market downturns.

This economic and capital market dynamism has made the US a very good place to invest over the longer term, relative to other developed markets.

From 1980 until now, cumulative returns of the MSCI US public equity index have been about 270% more than the cumulative returns of the MSCI EAFE (Europe, Australasia and Far East) index.

While there have certainly been periods of time where the returns of the MSCI US underperformed the MSCI EAFA (e.g., 1985-89: 55% lower cumulative returns; and 2000-09: 19% lower cumulative returns), longer term investors have been rewarded for staying invested in the US. And those periods of underperformance, more than anything, reinforce the importance of having a broadly diversified approach to the US market. For example, while US technology stocks seriously underperformed other developed market stocks after the bursting of the dot com bubble (2000-09: 40% lower cumulative returns), smaller US stocks did not. In fact, they outperformed other developed market stocks during this period (2000-09: 31% higher cumulative returns).

The lesson that ought to be taken from these periods of underperformance is that US investors should ensure they invest in both large and small companies, across industry segments and in both public and private assets to take advantage of the broad diversification that is possible within the US market, and reduce the risk of periods of underperformance, including underperformance relative to other developed markets.

The US has tended to be a big part of global investors’ portfolios. Over the longer term, this has been a successful strategy. There are good reasons to believe it will continue to be a successful strategy, irrespective of the outcome of the upcoming election, namely US economic and capital market dynamism.

Future US Investment Returns

While this US election feels very important, its outcome is unlikely to be the major driver of US equity market returns during the upcoming administration. Although, short term market volatility is entirely possible, depending on the result and how the transition plays out.

US GDP growth tends to be driven by broad secular phenomena like global trade patterns, demographics, public and private debt levels, economic cycles, policy trends in regulation and taxation, central bank monetary policy, and new technologies like the internet and AI (for the trends we believe all investors ought to have in mind, check out our World View). ?It would be difficult for any President to implement policy changes that could overwhelm these very powerful secular trends, especially considering the effective system of checks and balances in the US system.

And more importantly, as can be seen in the table below, even if Presidents could drive GDP growth rates, historically, there hasn’t been much of a connection between US GDP growth rates and US investment returns during Presidential terms. Instead, investment returns, have been driven by things that Presidents don’t control, and that are hard to predict in advance.

Some of the highest investment returns (Obama and Trump) were realized during periods of lower GDP growth. And while GDP growth was about the same (2%) during the H.W. Bush, W. Bush, Obama and Trump administrations, investment returns were very different (ranging from 16.3% to negative 4.5%).

Some of the drivers of relative investment returns are obvious. For example, W. Bush had the misfortune of beginning his first term with the bursting of the dot com bubble (the S&P 500 dropped 40% in his first 20 months). He then ended his second term with the onset of the GFC (the S&P 500 dropped over 50% in his last 18 months in office). The Obama administration, on the other hand, coincided with massively stimulative monetary policy (the target rate of the Federal Reserve was set at 0.25% for years) which acted as a tailwind for all asset values during his administration. And Clinton enjoyed eight years in office without a 20% correction in the S&P 500 – something that has happened about once every 5 years, on average, going back to 1950.

What is clear is that even if Presidents controlled GDP growth rates, other factors, including unpredictable market events, are often a bigger driver of investment returns during their terms.

Conclusion

The upcoming election feels very consequential. But GDP growth rates and investment returns over the course of the next Presidential administration are unlikely to be driven by the outcome of the election. And, as a place to invest over the longer term, there are many reasons to believe the US will remain the world’s most dynamic economy with strong long-term investment potential.

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