WITH the Republican Party poised to take full control of the US government, the American stock market could be set for a bullish forecast.
For investors looking to cash in on the action, the benchmark Dow Jones Industrial Average index, or the Dow, provides a “good diversifier” for their portfolios, said George Ferraz, the intermediary relationship manager at global asset manager State Street Global Advisors.
Historically, the Dow has performed better when the Republicans have control of both the executive and legislative branches of the US government, he noted.
Across the US election cycles from 1896 to 2024, the average two-year return of the Dow was 22.4 per cent under a fully Republican administration, compared with 19.3 per cent under a Democrat-controlled administration, and 10.5 per cent with a split administration.
This performance looks set to repeat with the Republicans gaining control of Congress and their candidate Donald Trump winning the latest presidential election.
Even before the elections, the US market has been “pretty positive” with the S&P 500 up 23.3 per cent and the Dow rising 15.4 per cent year to date, said Ferraz, who was speaking at “Exploring the Dow: Opportunities and strategies for US equities investments”. The panel discussion was held on Nov 9 at the Singapore Exchange Auditorium.
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Ferraz was the keynote speaker at the event, which was organised by The Business Times and presented by State Street Global Advisors.
Both indices hit record highs following Trump’s victory. The blue-chip Dow closed up 259.65 points, or 0.59 per cent, at a record 43,988.99, and the broad-based S&P 500 index finished up 22.44 points, or 0.38 per cent, at an all-time high of 5,995.54.
“After this week’s rally, it’s incredible how the market responded to a Trump victory,” said Ferraz.
He noted that aerospace and defence companies performed better during the first Trump administration, as did banks and financial institutions, which generally benefit from the lower capital requirements and regulations under a Republican government.
Diversifying through the Dow
For investors looking to invest in the US market, the Dow presents an opportunity for them to diversify their holdings, said Ferraz.
The inclusion of tech companies in the Dow – with Nvidia earlier this month and Amazon in February this year – shows how the 127-year-old index is evolving with time, he added.
The index started off with 12 stocks in 1896 and has since grown to 30 “blue-chip quality” stocks representing innovative leaders in the US economy, he said. These include tech stocks such as Apple, healthcare stocks like United Healthcare, as well as consumer stocks such as McDonald’s.
“These are companies that have an excellent reputation, demonstrate sustained growth, and have an interest among investors,” said Ferraz.
Unlike the S&P 500, which is weighted by market capitalisation, the price-weighted Dow provides a different exposure.
The financial sector features more heavily in the Dow compared to the S&P 500, which is more weighted in the information technology sector. Healthcare and consumer discretionary sectors are also better represented in the Dow than in the S&P 500.
“If you’re investing in an S&P 500 fund, you’re probably potentially doubling down on some of the Magnificent Seven stocks, so that’s one way to think about how you mitigate risk in your portfolio,” said Ferraz.
“In that sense, the Dow might offer a very good diversification benefit for your portfolios.”
The Magnificent Seven refers to the big market-cap technology stocks Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla.
In terms of historical performance, the Dow has done “pretty well, or even better” than the S&P 500, added Ferraz. For instance, between 2000 and 2024, the Dow posted an annualised return of 8.2 per cent, slightly higher than the S&P 500’s 8 per cent.
The Dow also has a higher dividend yield compared to the S&P 500 index, which makes it attractive to income-focused investors.
Access to the Dow also helps to diversify Singapore investors’ portfolios, said Ferraz.
A S$10,000 portfolio split equally between the SPDR® Straits Times Index ETF and the SPDR® Dow Jones® Industrial AverageSM ETF Trust outperformed one with just the SPDR® Straits Times Index ETF, over the period from 2004 to 2024.
“So this shows you that just by adding in the Dow Jones, you can one: add a little more diversification, and two: boost your returns,” said Ferraz.
State Street Global Advisors Singapore Limited (“SSGA”), 168, Robinson Road, #33-01 Capital Tower, Singapore 068912 (Company Reg. No: 200002719D, regulated by the Monetary Authority of Singapore). T: +65 6826-7555. F: +65 6826-7501.
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