Jeff Sommer
Jeff Sommer
STRATEGIES

In his first speech as president of the United States, Donald J. Trump declared, “From this day forward, it is going to be only America first, America first.”

If you had taken his words at face value, you might have expected that big American companies that make nearly all of their money in the United States would flourish in a new, America First environment.

But that’s not the way it has turned out, at least not in the stock market so far.

Shares of American companies that make nearly all of their sales domestically have lagged behind those that generate most of their revenue outside American borders. In fact, those globalized companies — I’ll call them International First companies — have outperformed America First companies by a wide margin.

Paul Hickey, a founder of Bespoke Investment Group, an independent market research firm, ran the numbers at my request. He found that 113 companies in the Standard & Poor’s 500-stock index make at least 50 percent of their sales outside the United States. Their fortunes depend, to a large extent, on the rest of the world’s economic trends.

It’s also relevant that many of these companies, like Apple, Microsoft, IBM, Pfizer, General Electric and Exxon Mobil, have stashed billions of dollars overseas. They stand to receive a windfall under proposed Trump administration tax policies that would allow them to repatriate that money at a very low rate, perhaps 10 percent, compared with the current statutory federal corporate tax rate of 35 percent. That potential bonanza, in itself, gives them a boost in the stock market.

By contrast, the America First category contains 161 S.&.P. 500 companies that make at least 90 percent of their sales within the United States. The group includes retailers like Macy’s, Nordstrom and Target, railroads like CSX and Norfolk Southern, and regional natural gas and petroleum companies like Southwestern Energy, Range Resources and Pioneer Natural. All of their fortunes are determined mainly by events and policies within the United States.

While each stock has its own story, Mr. Hickey said he found a clear pattern in the overall data. From the presidential election on Nov. 8 through this past Tuesday, he said, shares in the International First group gained an average 13.56 percent, compared with only 8.15 percent for the America First shares, for a spread of 5.41 percentage points.

That’s a substantial gap for a roughly six-month period. And it would be even larger if Mr. Hickey had used asset-weighted and not equal-weighted performance numbers in his calculations, because the International First group is salted with gigantic companies like Apple, Alphabet (Google) and Microsoft. Their enormous market capitalizations — Apple’s is more than $800 billion — have an outsize impact on asset-weighted indexes like the S.&.P. 500.

Why have the internationally oriented companies outperformed the domestically focused ones? Several factors explain the discrepancy.

First, the initial wild enthusiasm in financial markets for Trump policies faded.

“There was a lot of optimism by people in the markets about America First policies right after the election,” Mr. Hickey said, “but in 2017 in actual terms, that has been completely flipped.”

Soon after the election, when the Trump rally in the overall stock market had the most momentum, the America First companies did outperform the International First group. The markets may then have been reacting to Mr. Trump’s publicly stated views, which he summarized in his inaugural address this way: “Every decision on trade, on taxes, on immigration, on foreign affairs will be made to benefit American workers and American families. We must protect our borders from the ravages of other countries making our product, stealing our companies and destroying our jobs.”

American companies with little foreign exposure maintained an advantage in the stock market until mid-March, when the tables turned and the International First group pulled ahead.

As I wrote in March, it wasn’t just the stock market that changed course: The shift started in the currency markets. The dollar, which had soared on Mr. Trump’s surprise election victory, began to weaken against other currencies, particularly the Mexican peso.

More precisely, measured against a basket of currencies, the dollar peaked in strength on Jan. 3 — with a 6.53 percent gain since the election — and then began to plummet. On Thursday, the dollar was still stronger than it had been on Election Day, but by less than 1 percent.

Some of that decline may have been simple mean reversion, a tendency of markets to return to an average level after a big move. But there was more to it than that.

While the Trump administration’s effort to crack down on unauthorized immigrants has been real enough — Immigration and Customs Enforcement arrests jumped by nearly 40 percent in Mr. Trump’s first 100 days — the administration has not done much to alter international trade patterns.

That may still happen. On Thursday, it notified Congress that it intends to renegotiate the North American Free Trade Agreement (Nafta). But the parameters of that renegotiation have narrowed sharply, perhaps in response to substantial resistance to many of Mr. Trump’s policies by companies that have prospered under Nafta. Jeffrey Immelt, the General Electric chief executive, for example, has urged the president to avoid protectionism, and said on May 12 in Mexico that his company is “very supportive” of Nafta.

What’s more, Mr. Trump has moderated his position on China, reaching new trade agreements that may increase, rather than hamper, bilateral trade. That could improve the prospects for globalized American companies.

And Mr. Trump decided to send a delegation to Beijing for China’s economic conference on its new Silk Road plan, known as the Belt and Road initiative. That, too, could lead to more business for internationally minded American capitalists.

The International First companies have also been helped by signs of economic improvement in Europe and strong performance in foreign stock markets, many of which have been outperforming the American stock market in both local currency and in dollar terms. In short, American companies with heavy exposure to foreign markets have gotten some international tailwinds.

Domestic problems — Mr. Trump’s political struggles, and Congress’s inability to enact major legislation — may have led the stock market to ignore the Trump agenda. That helps globalized companies.

“You don’t hear much about America First policies these days,” Mr. Hickey said. “But it’s becoming clear that even if you don’t get thorough tax policy reform done or a big infrastructure stimulus program done, the stock market isn’t falling apart. Instead, the stocks that are leading the market now are not America First plays, they are international plays — companies geared toward international exposure that benefit from a weaker dollar and better growth overseas.”

Then there is the tax question. Despite the political turmoil in Washington, tax cuts and a possible windfall for the International First companies remain on the table. The administration still aims at repatriating at least some of the $2 trillion in stranded overseas corporate cash and ending the taxation of newly minted corporate profits earned abroad. Market analysts are already calculating the potential benefits to companies with substantial foreign earnings and big cash hoards, like Apple.

Put all of that together, and you get a recipe for a rally in International First companies. America First may be the administration’s slogan, but for the most part, the stock market has been ignoring it.