The USA is still the place to invest 

Despite the uncertainty surrounding the outcome of the US election in November, it is still the best place to invest your money, with its stock market producing above-average results for the past 30 years. 

This is feedback from Investment Strategist at Old Mutual Wealth, Izak Odendaal, who wrote in his weekly investment note that the impact of US politics on American equities has reduced over time. 

He said the one thing investors must avoid is making investment decisions based on politics and assumptions about economic policy before it is implemented.  

Six months from now, the United States will go to the polls to choose its president, congressional representatives, and state and local officials.                                                                                                        

The presidential election will be a rerun of the 2020 contest between Joe Biden and Donald Trump, except that this time, Trump is the challenger and Biden the incumbent. 

As the election nears, the noise around the “culture wars” in the US will increase. For investors, however, economic policy matters most.

There is some overlap between Trump’s and Biden’s economic policies. Both are wary of China and want to re-energise American manufacturing. 

Biden, for instance, kept most of the import tariffs Trump imposed on China in 2018. Under the CHIPS Act and the Inflation Reduction Act, the Biden administration has pumped billions into supporting US manufacturing. 

This has resulted in a three-fold increase in spending on the construction of manufacturing facilities.

In a nutshell, a Biden win would probably not have many new investment implications. The same cannot be said for a second Trump presidency.

Irrespective of who wins, the US has a long-term fiscal problem. Its debt-to-GDP ratio of around 100% seemed sustainable when interest rates were at rock bottom before COVID-19. 

Despite the solid economy, the US runs a 6% of GDP deficit, usually associated with recessions. Worryingly, there is no sign that borrowing will be scaled back anytime soon. 

Trump will likely extend the 2017 tax cuts that favoured companies and wealthy individuals, which are set to expire at the end of 2025.

If they are not extended, Americans’ tax burden will rise, which would be an economic headwind but reduce longer-term debt anxiety. 

Split White House-Congressional control also implies a recurrence of the debt ceiling stand-offs, government shutdowns and fiscal cliff scenarios that have dented trust in America’s fiscal policy process. 

The US debt-to-GDP ratio and its fiscal deficit are shown in the graph below.

Trump appointed current Federal Reserve chair Jerome Powell in 2018, but when he raised interest rates, Trump wanted lower rates to boost the stock market and support his political prospects. 

Trump appears to have already decided that the Fed is politically motivated. He has said he will not renew Powell’s four-year term when it expires in 2026. 

Odendaal said a reduction in central bank independence and politicisation of monetary policy in the US would greatly undermine global bond market pricing and functioning.

An enduring legacy of Trump’s first term is that protectionism is back on the agenda, not just in the US. 

Reliance on China as a source of cheap production is now seen more as a liability than an asset, and China itself is seen more as a competitor than a partner.

Trump has promised another big increase in import tariffs on China but has also indicated that he will go further, imposing an across-the-board levy on all imports. 

Looking at the above, a Trump presidency will, therefore, likely be inflationary. The combination of restricted labour supply, higher import tariffs, loose fiscal policy and a central bank that loses credibility is a recipe for higher inflation.

However, this does not mean that US equities will underperform. The American market outperformed the rest of the world in Trump’s first term, boosted by tax cuts and a rapid recovery from the Covid crash. 

Obama and Biden’s presidencies also saw US outperformance, as was the case during the Clinton-era internet boom (1992 to 2000). 

The US lagged behind the rest of the world during George W. Bush’s years, not due to his misadventures in Afghanistan and Iraq but rather the booming global economy, commodity supercycle, and weak dollar. 

In contrast, the implosion of the Japanese bubble meant that his father’s one term saw the best US outperformance of non-US markets.

The one thing investors should not do is let their own political views get in the way of investment decisions. 

When Barrack Obama was elected, there was a widespread view that he was a closet socialist who would tank the market. 

His eight years in office turned out to be great for the S&P 500. There were similar misgivings about Trump before his surprise victory in 2016, and those misgivings were similarly wrong.

The performance of US equities versus their global counterparts over the past eight US presidents is shown below.


Top JSE indices