After Donald Trump's election victory: is the big boom coming to the USA?

In a few weeks, the future US President-elect Donald Trump will take office. He is a successful entrepreneur who will do exactly the right thing to ensure strong growth in the US economy. Then nothing can go wrong, can it?

Executive Summary:

There are striking parallels between the current situation on the US capital market, namely a particularly strong share price performance, real estate price and exchange rate increases in an international comparison for years, coupled with very high valuations of these forms of investment, and the situation in Japan before 1990, right down to the narrative that is supposed to explain these exceptional phenomena. The extent to which the further development in Japan from 1990 onwards, namely a particularly weak development in share prices and real estate prices, could be repeated in the USA also depends on whether Trump's economic policy promotes the economy and the capital markets. However, this is rather unlikely. High tariffs have been accompanied by low equity returns in the US over the past 175 years. They also tend to have an inflationary effect and could therefore trigger an unfavorable interest rate trend. The reduction in the number of workers due to the planned mass deportation of immigrants is also clearly damaging for the US economy. Corporate tax cuts could push the US national debt to dangerous levels. Finally, deregulation is also not clearly positive when implemented by politicians such as Donald Trump and new politician Elon Musk, who are primarily pursuing their own interests.

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In a few weeks, the future US President-elect Donald Trump will take office. He is a successful entrepreneur who will do exactly the right thing to ensure strong growth in the US economy. Then nothing can go wrong, can it?

This may indeed be the current narrative on the US stock market. US share prices also rose significantly in November, while the rest of the world reacted rather cautiously to Trump's election victory (chart 1). The main driver was information technology (IT) stocks, which are known to be particularly well represented in the US and have boosted the local stock market, partly due to the current euphoria surrounding the topic of artificial intelligence. Share price gains in the US have also been significantly higher than the increases in company fundamentals (dividends, gross profits or cash earnings and book values, chart 2) since 2019, meaning that IT and US equities have become very expensive, while equities in the rest of the world have risen roughly in line with the fundamentals. As a result, golden years are only expected for the US economy, while stagnation is the order of the day in the rest of the world.  

In terms of residential real estate prices, the US is also outperforming the rest of the world (chart 3); prices have risen far faster than the fundamentals of real estate, which consist of rental income (chart 4).

Only Japan can keep pace with the USA in terms of rising real estate valuations; however, Japan is coming from a very low price level after the crash of the real estate bubble there at the beginning of the 1990s, so that a disproportionately high increase in real estate prices compared to rental income is understandable here (chart 5).

A certain lack of concern can also be seen in the yields on corporate bonds with good credit ratings in the USA. Chart 6 shows the yield spread of corporate bonds with a rating of BAA from the rating agency Moody's. In the last 45 years, this has only been at a similarly low level for a few very short periods before 1998 as it was in November2024 after the US election. Until the late 1970s, yield spreads were often lower than they are today, but at that time the total debt of the USA (companies, private households, government) was less than half as high as it is today (chart7). Accordingly, the risks to economic stability were also lower. If, contrary to general expectations, the US economy were to experience a recession in the near future, yield spreads would widen significantly and corporate bonds would suffer heavy price losses.

The exchange rate of the US currency also reflects an optimistic assessment of the future development of the USA compared to the eurozone (chart 8). However, the statistical analysis shows that a high valuation of the US dollar against the euro based on purchasing power (relative development of inflation rates in the US and the eurozone) will be followed by exchange rate gains for the euro against the US dollar over the next 10 years. The current overvaluation suggests that the euro will gain just under 4% p.a. by 2034 (chart 9).

The dollar is even more overvalued against the Japanese yen (chart 10). One of the reasons for this is the rapid growth in US net foreign debt since the financial crisis in 2008 (chart 11). When a foreign country lends money to a US borrower (government or company), the lender must first exchange its euros or yen for US dollars before it can lend them in the US. This creates a demand for dollars as long as US foreign debt increases. At a current level of 79% of US national income, this amounts to over USD 20,000 billion, which is now also generating high interest costs. If the USA's creditors demand money back at some point, the dollar will have to fall significantly. The high valuation of the US currency is therefore not necessarily a sign of good health. Accordingly, in countries that have significantly increased their net foreign assets (Germany and Japan) or completely reduced their foreign debt (Italy), the currency has been weak for years.

Now let's take a look into the past, when one country was already the global technology leader, namely Japan. This is illustrated by a quote from the magazine "Computerwoche" from December 13, 1991. December 1991: "The 1990s will decide which of the two nations will set the tone in the computer industry in the future. The Japanese have a good chance of overtaking the Americans here too". This global optimism about Japan's technological capabilities explains why Japan's stock market outperformed the rest of the world in the 1980s. If you compare chart 12 up to the black bar (December 1989) with chart 1, you can see that today's IT sector and the US stock market, like Japan back then, have outperformed enormously. However, this was not sustainable in Japan (chart 12, right half) because, unlike in the other countries, share prices had risen much faster than the fundamentals; Japanese shares had become far more expensive than the rest of the world in December 1989 (chart 13 up to the black bar), just like IT and US shares today (chart 2). After 1989, both share prices and valuations in Japan developed much more weakly than in the rest of the world.

The high valuation in Japan was not only due to investors' technology fantasies, but also to high credit-financed stock market speculation by Japanese companies on the stock market, because shares were allowed to be accounted for at the current or purchase price and the higher price could be chosen. This made share speculation appear risk-free, but at the price peak the dividend yield of 0.4% was only a fraction of the interest on loans, which was around twenty times higher, and share purchases were stopped because they now caused high losses due to interest costs. If the high investments made by today's technology giants in the development of artificial intelligence prove to be low-yielding, high write-downs are likely to weigh on profits. Trump's future tariffs will also weigh on some technology companies such as Apple, Tesla and Nvidia, as these companies require substantial imports from China, which will then become more expensive.

Another parallel is that the Japanese real estate market also developed more strongly than real estate prices in the rest of the world as a result of the general euphoria (chart 14, see corresponding chart 3). Similarly, the valuation of Japanese residential real estate compared to rental income rose more strongly than in other industrialized countries up to December 1989 - as is the case in the USA today (charts 15 and 4).

After all, the Japanese yen appreciated significantly against the dollar and the euro (calculated backwards) in the 1980s (chart 16), and the dollar has currently appreciated against the yen and the euro in recent years (charts 8 and 10).

The situation in Japan in the 1980s thus shows considerable parallels with the current situation in the USA.

Up to this point, the interim conclusion is that equities, residential real estate, corporate bonds and the currency in the US are likely to be overvalued and future earnings expectations below average. Could this scenario change as a result of Trump's election?
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Below we look at the potential impact of the measures promised by Trump.
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The planned deportation of millions of immigrants will certainly have negative consequences for the US economy. Immigrants in the USA do not immigrate because of lavish social benefits, but because they want to build a livelihood for themselves and their families through hard work.
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Deutsche Bank has calculated the - unsurprising - consequences in its study. According to the study, a decline in the number of people of working age leads to a decline in economic growth (Figure 17). This trend does not change even if per capita economic growth is taken into account (Figure 18). A decline in the number of people of working age relative to those over 65, which would occur if the mostly younger immigrants were deported, would also have a negative impact on economic growth (Figure 19).

deporting millions of workers is exactly what the USA does not need at the moment.

This also applies to the imposition of high tariffs. Tariffs initially have an inflationary effect because the desired effect is precisely that foreign goods become more expensive and therefore less attractive for American buyers. With higher inflation, however, there is a risk that interest rates in the USA could rise, which will not happen in the eurozone given the weak economy. A rising interest rate differential should push the dollar up further, at least in the short term (chart 20), but rising interest rates would weigh on the US economy.

Figure 21 shows the US government's tariff revenue since 1850 as a percentage of import volume. Trump's plans would throw the US back to the 1930s, when it was also believed that tariffs could protect US industry during the Great Depression. As a result, US imports and exports fell by over 60% within just three years, as did global trade as a whole, making this crisis the worst depression in US history. The share of tariffs in the worsening of the crisis is estimated to be very high (source: Wikipedia, keyword: Smoot-Hawley Tariff Act). In the 19th century, tariffs were an important part of the financing of the state, which levied only very low taxes and believed that tariffs would shield the young domestic industry from European competition. They were also an instrument of corruption. In return for campaign donations, presidential candidates offered industrial companies customs duties that were directly aimed at their competitors.

The stock market will not benefit from tariffs either. Only in times of low tariffs (less than 10% of the import volume) does the stock market deliver high real price gains of almost 8% p.a.; even with the tariffs planned by Trump, the annual share price gain falls by more than half to 3.6% p.a. (chart 22).

The negative effects of mass deportations and high tariffs are so clear that it is reasonable to assume that they are largely based on election campaign slogans. During Donald Trump's first presidency, much less was realized than had been announced, e.g. the construction of a wall on the border with Mexico.

The massive deregulation planned by Trump and cheered on the US stock market will not only be positive, but will lead to an expansion of fraudulent or simply bad product offerings and services, according to a statement by the recent Nobel Prize winner in economics Daron Acemoglu (professor of economics at the renowned US university MIT), as will the deregulation of the crypto sector, which is known for fraud and which has attracted Donald Trump to its side through massive campaign donations (source: Finanz und Wirtschaft, November 2024).

The reduction in corporate taxes from 21% to 15% (Trump has also mentioned 20% because it is a nice round figure) is also seen as a plus for the stock market, but is not sustainable due to the already dangerously high national debt (chart 23).

In the short term, Trump could improve sentiment with a further increase in government spending, new tariffs to secure jobs and improve government revenue, and tax cuts. However, this would mean that further interest rate cuts would only be made to a limited extent or not at all, which would weigh on the economy. The hope is that Trump will only implement his proposals in homeopathic doses and thus keep the damage to a minimum. The Leading Economic Indicators (LEI) for the US economy published in November have fallen again (chart 24), as have the two other major economic areas (China and the eurozone, charts 25 and 26), which would suffer particularly from the planned tariffs. In none of the world's three major economic regions has there been such a sharp decline in LEIs in recent decades without a subsequent recession.

The rise in trend-adjusted share prices is also completely unusual, while at the same time the trend-adjusted LEIs are falling (red box on the right-hand side of the three charts 27 to 29). Previously, there was also a (pink) phase in each region with LEIs and share prices moving in opposite directions, but LEIs rose and share prices fell. However, the influence of weak LEIs already seems to be making itself felt in the eurozone, where share prices may have peaked.

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Conclusion:

For several years, the US capital markets (equities, real estate and exchange rates) have shown considerable parallels to the former technology stronghold of Japan in the years prior to December 1989, in particular a strikingly better share price performance, but also a significantly higher valuation of shares, which then contributed to a very weak share performance in Japan from 1990 onwards. Equally comparable was the significantly stronger real estate price development in international comparison and the appreciation of the currency. The narrative, namely the conviction that high technology would only come from Japan at that time, is also comparable with the current undisputed supremacy of the USA in this area.

Many share buyers are now hoping that Donald Trump will pursue a business-friendly economic policy and that this will allow US shares to continue to soar. Unfortunately, the measures he has planned are either unsustainable - in this case, the further reduction in corporate taxes, which the heavily indebted US government can no longer afford - or they are even harmful to the US economy. First and foremost is the threat of mass deportation of immigrants, most of whom are also workers. Labor shortages and higher inflation due to higher wage increases would be the expected consequences. Tariffs, which make foreign goods more expensive in the USA and thus weaken the purchasing power of American consumers and also damage US companies through counter-tariffs, also have a clear inflationary effect and a negative impact on share price gains. More inflation means fewer interest rate cuts or even higher interest rates; both would be bad for the US economy, whose leading indicators are already pointing to recessionary tendencies. Deregulation would actually be clearly positive, as bureaucracy is also a problem in the US, but only if it is carried out by serious politicians who have the common good in mind above all. Donald Trump and Elon Musk, the deregulation commissioner, do not fulfill this requirement to a sufficient degree.

Consequences for the portfolio

• ‍Shares: The current overvaluation of US shares, particularly in the IT sector, calls for caution. Investors should diversify their positions and focus on regions and sectors that are less overheated, such as Europe or emerging markets. In the short term, defensive sectors such as healthcare or consumer staples could offer security. We are underweighted in equities and hold more liquidity. Within equities, we have underweighted the US in favor of all other regions and hold slightly more defensive sectors.‍
• Corporate bonds: The current low yield spreads on corporate bonds indicate an increased risk. In the event that the US economy slips into a recession, significant price losses are to be expected. This could then be a good time to re-enter the market. We are currently avoiding corporate bonds.‍
• Gold: Gold remains an important hedge against inflation, political uncertainty and currency risks. Investors should hold a strategic position in gold, ideally 5-12% of the portfolio. 
• Real estate: The US residential real estate markets are highly valued and a correction cannot be ruled out. Global diversification in more stable real estate markets can reduce the risk.

Finally, our key statements from the November 2021 Capital Market Outlook, which you can find here can be found here:

Three years ago, we examined the situation in China for the first time and came to the conclusion that China was facing enormous problems because a great deal of capital was being wasted on vacant apartments in the real estate market. We also outlined the difficult living conditions, e.g. still completely overpriced residential real estate prices and high costs for education and, as a result, a sharp drop in birth rates. As a result, we predicted that China will also have to increasingly support its economy with state aid in the future and that the historically unprecedented boom will come to an end.

You can also download the capital market outlook here.