December 12, 2016

Market's optimism of the Trump stock market rally could be premature

Trump faced numerous objections this year (many similar to what Quayle faced), but many of his supporters have compared The Donald to the late President Ronald Reagan. But next week, I'll chronicle the substantive differences that I see between Reagan and Trump, as well as highlight the different circumstances that existed at the Reagan administration's beginning vs. what Trump faces today.

Since the Great Recession, the Federal Reserve's Zero Interest Rate Policy and quantitative easing have stabilized our country's economy and led to modest annual real GDP growth. But the Fed acts unilaterally. By contrast, fiscal stimulus requires the joint action of Congress and the president -- a more complicated and nuanced process.

To this observer, the market's current leap of faith that the Trump administration seamlessly will jump-start the U.S. economy through fiscal initiatives, tax cuts and the elimination of burdensome and expensive regulations may be misplaced, just as market optimism surrounding the Reagan administration was misplaced and premature.

On the latter score, it is important to remember that during the three-month period from the time Reagan was elected in November 1980 to his inauguration in January 1981, market euphoria took the S&P 500 8.5% higher. However, the market fell dramatically from January 1981 through August 1982, declining by 28% from the 1980 election and by 20% from Reagan's 1981 inauguration.

The Bottom Line

To many, Trump's stump speech and campaign slogan "Make America Great Again" mirror Reagan's successes in righting the U.S. economy, developing a stronger military force, rejecting globalization and overcoming our chief adversary, Russia. Trump's election win, like that of Reagan, also comes at a time when many Americans feel downbeat as the gap between wealth and income inequality has continued to widen in what I term "The Screwflation of the Middle Class."

But as I'll discuss next week, the Trump administration faces an entirely different set of circumstances that Reagan did 35 years ago. Like Reagan, Trump possesses a charismatic personality (and at times a less-than-precise grasp of facts), but Washington was different in those days. Bipartisanship often flourished.

As Chris Matthews wrote in "Tip and The Gipper: When Politics Worked," politics and ideological differences were set aside at 6 p.m., particularly between Reagan and Irish-American Democratic leader Thomas P. "Tip" O'Neill. In time, Reagan cut meaningful deals with the Democrats, such as the revision of the Social Security program.

Unfortunately, the times they have changed and partisanship now rules the day. The adoption of crucial legislation is no longer a seamless process, as the animus between Democrats and Republicans is a thick and almost impenetrable fog of mistrust.

So, comparisons between Trump and Reagan and the economic and social conditions that exist today vs. then fall short -- and the legislative and executive outcomes may differ meaningfully.