The Starting Line for Reagan vs. Trump
By Michael McKeown, CFA, CPA - Chief Investment Officer
“Timing in life is everything.” – Leonard Maltin
There is a post-term narrative on each President’s economic policies. Blame or praise comes from the performance of businesses, the economy, and financial assets. There is probably too much time wasted cheerleading the accomplishments, and too much time spent by the other side tearing it down. The “team” you are on determines the prism through which you view the success of a Presidency. This is true from Reagan to Clinton. Far more important to the big picture are financial and economic factors along with the life stage of technology at the start of each Presidency.
Many people compare the incoming policies of President Elect Donald Trump to Ronald Reagan. The new Reaganomics is Trumponomics. Prior to the election, one of Trump’s primary economic advisers, Larry Kudlow, gave a talk that I attended in New York. He advised essentially the same prescriptions as he had for Reagan - supply side economics. Lower taxes and regulations will bring about a greater supply of goods and services for consumers at lower prices. The goal of which is greater growth for all. Based on the campaign, Trump also supports a $1 trillion infrastructure plan. This is decidedly not supply side economics or what core Republicans stood for the last several years.
The success or failure for Trump’s post narrative Presidency will have much to do with the starting point of financial and economic data. Let’s compare a variety of these data points to 1980, when Reagan took office, to 2016 for Trump.
Jobs are what many believe this past election was all about. When Ronald Reagan took office in 1980, the unemployment rate was 6.3% and already rising. In contrast, the unemployment rate today is at 4.6% or at the lowest 10th percentile. In other words, it has been higher 90% of the time over the last 42 years. In addition, the economic expansion is in its eighth year, with few signs of a recession in the next twelve months. In contrast, Reagan’s first term began with a mild economic recession, for which he did not get the blame. This is a more difficult starting point for Trump. It can be said that it is best to have a recession early in your first term if you want a successful presidency!
Let’s turn toward financial assets and look at stocks, bonds, and the dollar.
For financial assets, 2016 is a much harder spot to begin a presidency. The sideways bear market of the 1970s gave stocks a cumulative return of 6% for the eight years ending in 1980. From 1980 to 1988, stocks returned 245%. With high valuations and low interest rates, future returns will be tough to compare to the rocking Reagan years. Obama was fortunate to come into office in the middle of the Great Recession and after stocks lost 24% cumulatively the prior eight years. Stocks went on to return 217% in the following eight years.
The strength in the dollar is a concern in the near term because it can lower exports. There is room for an orderly devaluation of the dollar to provide stimulus to the economy.
One area where Donald Trump’s policy aligns with what we have been focused on, is that the U.S. cannot run out of money. The risk of spending “too much” is inflation, not default. Yet, inflation has been what central bankers have been trying to get higher for last five years. Despite the high overall level of debt, government spending as a percent of GDP was the lowest since 1960 over the last twelve months at 17.6%. On the other hand, Reagan inherited a small current account surplus while there was a modest deficit over the last year at -2.6%.
Finally, growth has been slower at only 2.2% annualized over the last four years. This is the next administration’s focus. Some might blame the poor demographics, lower increase in workforce (as the 1980s had the tailwind of women joining the work force in droves), and technology displacing many jobs across industries. Nonetheless, economic stimulus through spending and tax cuts that can be pushed through fast and effectively is Trump’s way of getting GDP back to 4%. If that happens, Trumpnomics will probably be deemed a success.
This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.