Donald Trump has benefited from a stable economy in the US – but who knows how long that will last

There is a vulnerability to asset prices. Maybe they will continue to climb, but they might fall sharply ahead of the forthcoming economic slowdown

The S&P 500 hits a new all-time high. Good for Donald Trump, or maybe better for Elizabeth Warren?

To unpack that thought, a solid stock market is of course a sign of confidence in the US economy, and a remarkable one in the face of growing concerns about a slowdown in 2020. But it is also a result of the loose monetary policies around the world. The European Central Bank announces that it will print some more money. So where does that money go? Some of it goes into US equities, because US growth is faster than German, French or Italian growth. The Chinese authorities try and pump up the economy. Where does some of that money go? Yup, the US again – it doesn’t go into Hong Kong, that’s for sure.

So insofar as strong share prices reflect a strong, or at least a relatively strong economy compared with the rest of the developed world, that must help an incumbent president. There is a question as to how long the boom continues, for it is pumped up by a huge fiscal deficit of more than 4 per cent of GDP, as well as what, by historical standards, are very low interest rates. The hope for the president is that reasonable growth and strong equity prices continue for another year. But a booming US stock market, indeed booming asset prices in general, make the rich even richer. The festering sense that it is deeply unfair for people to become wealthy by sitting on their assets rather than earning their money like everybody else is the key driver pushing the Democratic presidential candidates to the left, hence the calls for a wealth tax. Leading that charge is Elizabeth Warren.

The wealth tax issue has become a hot topic. Senator Warren, the first candidate to call for a wealth tax, has proposed a rate of 2 per cent above $50m and 3 per cent above $1bn. (Senator Bernie Sanders wants a rate of 8 per cent for fortunes above $10bn.) In electoral mathematics the idea would seem attractive, in that you don’t lose many votes of people with assets of more than $50m, because there aren’t enough of them. But there are about 40,000, according to the most recent Knight Frank Wealth Report, and there are nearly a million people in the US with more than $5m, who might also feel vulnerable to the idea of a wealth tax.

After all, the threshold for a tax brought in to catch the very rich might be squeezed down to hit the merely fairly rich. Besides, they have children and grandchildren who they would like to help, and churches, universities and charities who rely on their donations. The losers would feel very strongly about a new tax, while the gainers might not perceive how they would benefit. So the electoral maths are not as clear-cut as they might seem.

There is a further twist: inflation. Inflation, currently running at a headline rate of 1.7 per cent, is in a sense a wealth tax, for unless you can earn more than that on your assets your wealth is in effect being passed to other people. So-called core inflation is 2.4 per cent.

All this will play out in the coming months. The more asset prices continue to rise the more the idea will move to the forefront of the political debate. So is there anything sensible that can be said about asset prices in the months ahead?

Of course none of us can know what will happen, but here are three observations.

One is that the dividend yield on the S&P 500 is below 2 per cent, compared with an historical average of more than 4 per cent. (By comparison, the FTSE 100 companies yield just under 4.5 per cent, which shows how out of fashion UK shares are right now.)

The second is that US residential property prices are up 4.8 per cent year on year, according to Zillow though there have been sharp falls at the top end, particularly in New York, where a luxury tax took effect in July. That suggests a certain caution is in order. In the US, as in the UK, a home is most families’ largest single asset.

And the third is that bond yields are unsustainably low. US 10-year treasuries are on 1.8 per cent, which is at least above headline inflation. Elsewhere in the world, they are negative in real terms, ie, after inflation, and in Europe negative in absolute terms. Someday normality will return and bond prices fall, perhaps they will even crash.

So there is a vulnerability to asset prices. Maybe they will continue to climb, but they might fall sharply ahead of the forthcoming economic slowdown.

Politicians on both sides should remember that, and beware.