The US market rally this year has been partly attributed to President Donald Trump's proposed reforms © Getty

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The list of variables that US investment advisers must consider when deciding how to allocate their clients’ portfolios has become especially daunting over the past six months.

The unpredictability of President Donald Trump’s administration, the prospect of tax reform, the strength of corporate earnings, the expectation of rising interest rates and the uncertainty surrounding the US stock market are all weighing heavily on their minds.

Since the start of the year, President Trump’s supporters have put the rise of the US equity market down to what they call the “Trump Bump”. The rally lifted the S&P 500 stock index 7.9 per cent and the Dow Jones Industrial Average 6.4 per cent in the first five months of the year. But few advisers are attributing their decisions to increase US stock allocations to Mr Trump’s presidency.

“It’s more to do with the Federal Reserve’s confidence and their outlook to continue raising interest rates,” says Walter Gondeck, managing director and partner of The Lerner Group, a wealth management practice in Chicago.

Mr Gondeck and others say that corporate earnings in the US and abroad were improving before Mr Trump was elected. He adds that because areas such as the eurozone are now growing faster than the US for the first time since the financial crisis he has also increased the allocation of international equities in his client portfolios.

Brian Holmes, president and chief executive of Signature Estate & Investment Advisors, based in Los Angeles, agrees that several factors contributed to the current US market rally other than the Trump presidency. But he has been positioning portfolios with Mr Trump’s proposed policies in mind.

Mr Holmes made what he calls “obvious” investments that analysts long speculated would appreciate due to the new administration’s campaign promises. He increased equity allocations in defence, cyber security, homeland security, infrastructure and building materials companies.

He says a bigger reason to invest in US equities is the possibility of Mr Trump’s tax reform. The proposals, which would cut the federal corporate tax rate from 35 per cent to as low as 15 per cent, could cause corporate earnings to rise, prolonging the market rally. Mr Holmes maintains that the anticipation of tax cuts has already helped sustain the rally and the prospect of increasing corporate earnings “has been priced into the market”.

But he warns: “If tax reform does not happen or it doesn’t happen [to the extent] the markets are looking for, that could cause some volatility over the next six months.”

The Fed’s handling of interest rates is also influencing investment decisions. The Fed raised rates on June 14, which was the fourth rise since 2008 and second of the year. As expected, many advisers have moved out of real estate, utilities and consumer staples that falter in a rising rate environment, and into financials and banks, which benefit most from those conditions. On May 30, Robert Kaplan, Dallas Fed president, suggested there could be one more rate rise by the end of the year, signalling that the Fed has confidence in the strength of the US economy.

“If the Fed is confident to continue to raise interest rates and it’s not purely for curbing inflation, that’s a good sign for the whole economy,” says Mr Gondeck. “We expect equities to continue to do well.”

While some advisers have made strategic moves based on changing conditions, others have stayed true to their original investment philosophy.

“We haven’t made any moves due to the election, interest rate moves or our outlook on the market and economy,” says Patrick Collins, partner and managing director of Greenspring Wealth Management, based in Maryland.

Mr Collins avoids investment decisions based on market or political predictions because he says there is a lack of evidence that tactical allocation funds — which respond to events by adjusting the make-up of the portfolio — generate returns above typical benchmark funds. According to Morningstar, the research provider, tactical allocation funds were up 5.3 per cent in the first five months of the year, underperforming a 7.9 per cent rise for the S&P 500 over the same period.

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