By Brian Swint
Nov. 15, 2024
The stock market may be firing on all cylinders after Donald Trump won the presidential election this month. But even with his promises to lower taxes, loosen regulation, and favor U.S. firms in international trade, the real value for stocks comes from something much more basic.
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While it’s clear that another Trump term is bolstering investor sentiment at the moment, for Dan Kemp, chief research and investment officer at Morningstar, the best opportunities aren’t the typical Trump trades.
That’s because history suggests that presidents don’t have as much power over stock prices as they might want voters to think. The market performs about as well under Democrats as it does under Republicans. The bigger drivers are business cycles and surprising events that investors can’t plan for.
“The party in the White House doesn’t have that great an impact on asset prices,” said Kemp in an interview. “Our research shows that since 1881, less than 1% of return comes from who’s in the White House, while about 18% comes from starting valuation.”
One example: oil stocks under Biden and Trump. Trump is widely seen as friendlier to Big Oil, but energy companies performed substantially better under Biden. That was largely because Russia’s invasion of Ukraine in 2022, which sparked fears of a global shortage, carried more weight than the individual who happened to be serving as president.
If valuations are a more reliable guide, investors would do better to pivot away from Big Tech stocks in the U.S. after their stellar run the past few years.
Large-cap tech stocks are “trading at really high valuations, so we see that part of the market as offering lower future returns,” Kemp said. “By contrast, smaller companies on the value side of the ledger have been deeply unpopular and we’ve seen the gap in their valuations stretch to really unusual proportions.”
Outside the U.S., there’s even more value, at least on paper, in China and Europe—two regions that stand to be hit particularly hard if Trump follows through on his promises to raise tariffs on imports.
“Grab any investor on the street and they’ll give you five good reasons why China is a bad investment now,” Kemp said. “But when you separate those well-known critiques, we’re seeing some really good quality large-cap technology stocks trading at really low valuations. This is a good place to go if you want to stay away from those larger, more expensive U.S. stocks.”
Shares in Europe also look relatively good—Morningstar research shows that European equites trade at a 5% discount to their fair-market value, in contrast to a 5% premium in North America.
Of course, the time horizon is important for value investing. Kemp would agree with the adage that in the short term, the trend is your friend.
“If you’re focused on the next 3-6 months, momentum is clearly your best guide,” he said. “If people are going to use valuations as a guide, as they should, they need to be patient.”
Write to Brian Swint at brian.swint@barrons.com
This Barron's article was legally licensed by AdvisorStream.
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