The economic landscape surrounding the 2024 US election has undergone a significant transformation. During his first term, former President Donald Trump frequently highlighted positive market trends, particularly the robust performance of the S&P 500 index, which saw substantial gains following his election in 2016. However, this time around, the narrative has shifted dramatically. Markets have reacted more modestly, and the president's focus has pivoted away from stock market triumphs to issues like government spending and tariffs. This change reflects broader economic concerns and a shift in investor sentiment.
In the early days of his presidency, Trump was a vocal advocate for the stock market, often attributing its success to his policies. The S&P 500 surged by 13% from Election Day in 2016 to the end of February the following year, capping off a remarkable 20% gain by year-end. Fast forward to 2024, and the market has only seen a modest 2.5% increase over the same period, far from the exuberance of his first term. Analysts at JPMorgan noted that during his initial tenure, Trump tweeted favorably about the market 156 times, but since the start of this year, such mentions have dwindled to just one post.
This shift in tone is not merely a matter of social media habits. It underscores a broader change in economic dynamics. Early in his presidency, Trump's policies were seen as catalysts for growth, with import taxes viewed as beneficial for domestic manufacturing and federal spending cuts hailed as fiscal prudence. Now, these same policies are increasingly perceived as potential risks to the economy. Retail sales have plummeted to their lowest levels in nearly two years, consumer confidence has nosedived, and small business optimism appears to be waning. These developments suggest that the so-called "Trump trades"—investments premised on his economic agenda—are losing steam.
Moreover, short-term data releases in the US have consistently fallen short of expectations, while European markets continue to outperform. Citi’s economic surprise index highlights this disparity, with US forecasts repeatedly missing the mark. Despite some bullish outlooks, analysts are closely monitoring incoming data for signs of an economic inflection point. The decline in Tesla shares, down 40% since mid-December, further exemplifies the challenges facing American markets. The electric vehicle maker, once a symbol of innovation and growth, is now grappling with declining sales and consumer backlash.
Amidst these shifts, one outlier stands out: the Russian ruble, which has appreciated nearly 30% against the dollar this year. While this may seem counterintuitive, it underscores the unpredictable nature of global markets. For US investors, the current environment presents a challenging backdrop. Sentiment can change rapidly, and what was once seen as a sign of strength may now be interpreted as a warning signal. As the economic narrative continues to evolve, the road ahead for both markets and policymakers remains uncertain.
The investment landscape has seen significant shifts, with small companies in the United Kingdom facing unprecedented challenges. According to recent analysis by Abrdn, UK small-cap stocks are currently trading at their lowest valuation compared to historical averages and global peers. This presents both risks and opportunities for investors willing to take a long-term view. The forward price-to-earnings ratio for UK small caps is 24.3% below its 10-year average, making it the most discounted market globally. This trend contrasts sharply with the soaring valuations of US tech giants, which have dominated global stock market gains.
The Current State of UK Small Caps
The current valuation of UK small-cap stocks reflects a challenging period marked by outflows from domestic equities. Investors have shifted their focus towards larger, more stable markets like the United States, where tech stocks have been driving growth. Despite this, there are signs of resilience among UK smaller companies, with many demonstrating strong earnings growth and outperforming their global counterparts. Abby Glennie, co-manager of Abrdn’s UK Smaller Companies Fund, highlights that while the sector has faced difficulties, it remains home to numerous high-performing businesses.
Diving deeper into the data, the forward price-to-earnings ratio for UK small caps stands at 24.3% below its 10-year average, indicating a significant undervaluation. This discount is even more pronounced when compared to other regions, such as Europe, where small caps are also trading at a lower valuation but not as steeply. The underperformance of UK small caps can be attributed to several factors, including Brexit-related uncertainties and the withdrawal of institutional investors from domestic markets. However, experts like Glennie argue that these challenges could present an attractive entry point for long-term investors. She emphasizes that volatility should not deter those who see potential in the sector's growth prospects.
Potential Catalysts for Recovery
Despite the current challenges, there are reasons to believe that UK small caps could experience a resurgence. Recent developments, including discussions around a potential trade deal between the US and UK, may provide a much-needed boost to investor confidence. Additionally, the sector has shown improvements in capital allocation, with increased share buybacks and dividend yields. These changes suggest that UK small caps are adapting to meet the needs of investors and positioning themselves for future growth.
Looking ahead, the recovery of UK small caps will likely depend on several key factors. One crucial element is the reversal of trends that have led to reduced demand for domestic equities. For instance, UK pension funds have significantly decreased their holdings in domestic stocks, holding just 4.4% of their portfolios in this asset class, down from 15% in 2015. Evangelos Assimakos, an investment director at Rathbones, cautions that while UK small caps offer compelling value, investors must remain aware of structural changes that could impact the market. He points out that Brexit has had a lasting effect on UK equity markets, and reversing this trend may take time. Nevertheless, the potential for a revaluation exists, especially if conditions improve and investor sentiment shifts back towards UK assets.