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For the past 50 years or so, the approach of most Americans to retirement has been to put as much money as possible into US markets and then forget about it until they’re in their sixties. And for those who could do so, this has worked out very well. If you’d invested $1,000 in an S&P 500 index fund in 1980, it would be worth nearly $165,000 today.
But the stability and returns of American asset markets have been based on the stability and dominance of the US itself. So what happens if the Trump presidency upends that? What might it mean for the $42tn in US retirement savings, and the trillions more in international pension savings held in US assets, if the basic rule of law in America can no longer be taken for granted?
It’s a question that has come up in multiple conversations I’ve been a part of recently, as people grapple with the longer-term impact of the erosion of American democracy on their personal wealth.
Some of these individuals are selling tech stocks and buying gold exchange traded funds — not for the purposes of short-term speculation, but as a hedge against a longer-term future that suddenly seems less clear and prosperous at home. I know many people who are desperate for diversity in their portfolios now putting spare cash into apartments in Paris or Rome, sight unseen, rather than ploughing it into US markets.
These are random examples. But it’s not only retail investors and money managers who are considering a future in which our assumptions about the longer-term security of American capital markets change in a big way. Pension funds are beginning to consider the question, too.
Kevin Thomas, the chief executive of Share, a Vancouver-based non-profit institutional advisory service representing a group of long-term global investors with $90bn in assets, said that concerns about the basic stability and integrity of US markets under Trump came up at the firm’s annual summit last week.
“Regional allocations don’t just turn on a dime, and there’s long been a bias towards US markets,” Thomas says. “Even in the last few months, there had been a reluctance to admit that [Trump] would do all these stupid things.”
But in the past few weeks, he adds, “there’s been much more of a dynamic where you can’t count on normal being normal. [Many investors] won’t go into China because it’s authoritarian and unpredictable. But what if the US is too, now?”
There is a large body of economic research that shows that when the rule of law is weaker, investment tends to fall, not only in fixed investment but also in more liquid assets. Democratic norms have been challenged in the US since Trump was first elected in 2016, and are being positively flouted today. Federal court rulings have been ignored and entire government agencies dismantled by the White House in what is almost certainly a violation of Article 1 of the constitution (which gives Congress the power to give and take away appropriations).
Back in 2023, with candidates who denied the result of the 2020 presidential election prevailing in a number of statewide races, Princeton professor Layna Mosley issued a report, along with the Brookings Institution and the States United Democracy Center, which looked at the financial and economic dangers of democratic backsliding in the country.
The report found, among other things, a major “democratic advantage in the realm of sovereign borrowing”, and a disproportionate effect of increased political risk in the US on financial markets. “The primary effect of democratic backsliding on investment portfolios could be dramatic . . . shocks to US bond and equity markets, the US banking system, and the US dollar would be transmitted throughout the global economy.”
Of course, unlike other markets, the US has tremendous leeway for bad behaviour given the primacy of the dollar and the overweighting of US assets in most portfolios. American institutional investors in the country typically keep 65-70 per cent of assets in US markets, and pension funds can only make swings of a few percentage points without board approval.
What’s more, as one former executive for a major pension fund pointed out to me, “most public pension funds wouldn’t want to speak out about their worries right now” — not only because of a reluctance to further spook the market, but also because of fears about retribution from the White House.
But that doesn’t mean they don’t have concerns about the traditional overweighting of US assets. While some fundamentals such as American corporate earnings and macroeconomic factors like demographics still favour the US relative to other markets, there’s also a clear sense that the global political economy is changing. American exceptionalism may well be over.
“Things really are going to be different in the next 10 to 20 years in a way that we have no precedent for,” says Richard Bookstaber, a veteran risk manager and financial regulator now a managing director at MSCI.
What happens in the White House over the next four years may influence financial markets for decades to come. Retirees, like most investors, are looking for places to hedge against increased political risk in the US. Opportunities abound for markets that can capture the pension pot.
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