In the run-up to last year’s US presidential election, many investors had been fearful of the uncertainty that would be generated by a Donald Trump victory, so much so that the election was widely seen as a major ‘risk-off’ event for global financial markets.
Although President Donald Trump’s agenda was strongly pro-growth and promised to radically shake up US tax, immigration and trade policy, the prospect of an outspoken and controversial businessman with no high-level political experience threatened to inject huge uncertainty into US politics.
The unexpected strength of the Republican victory, however, seemed to sweep aside such concerns, and launched US equity markets on an upward trajectory fuelled by expectations of a strong pro-growth economic policy.
What has come to pass since then has had elements of both the expected and the unexpected.
The new administration has certainly delivered on expectations of controversy, but as the year has progressed, optimism about the pace of policy reform appears to have faded as it has struggled to gain traction with Congress.
The Presidency has trudged through difficulties with healthcare reform, been distracted by issues related to accusations of Russian involvement in the election and enacted a raft of personnel changes.
And yet, the surge in consumer and business confidence that was generated by the sweeping Republican victory remains unabated and has helped to significantly lift US economic growth this year.
US unemployment has fallen to its lowest level in over a decade, while US gross domestic product (GDP) growth looks to be firmly on track to reach 2.5 per cent this year, up from 1.6 per cent in 2016.
Tax reform momentum
Although the new administration appears to have offered little in the way of political certainty, it continues to fuel hopes of major tax reform – a central plank of Trump’s pre-election agenda.
While some aspects of this seem to have fallen by the wayside (his suggested border adjustment tax, for example), the remaining proposals still represent a powerful drug for equity investors - in particular, the prospect of substantial cuts in corporation tax and a repatriation tax holiday for overseas profits of US corporates.
The latter last occurred in 2004, under the Bush administration, when much of the cash immediately found its way into shareholders pockets via dividend payments and share repurchases.
It is particularly noteworthy that approximately one third of the estimated $1.7trn in overseas corporate cash holdings is held by five of the biggest US tech companies (Apple, Microsoft, Google, Cisco and Oracle), thus highlighting the sensitivity of the tech sector to this particular proposal.
US dollar remains vulnerable
This year, the return on the S&P 500 has been well into double figures as the index has continued to chart a series of all-time highs. But overseas investors in US equity markets have struggled as the US dollar has fallen in value.