Donald Trump is not Ronald Reagan. That should be obvious, but many optimistic conservatives are drawing parallels and predicting economic nirvana over the next four years.
That’s unlikely to happen, but, conversely, the incoming president is not Barack Obama, either. The Obama presidency has been disastrous on many fronts, creating economic stagnation, a doubling of the national debt, and foreign policy disasters, such as the lifting of sanctions against Iran and Cuba in return for pretty much nothing.
We’re not about to join the media in bashing the president elect for choosing cabinet members that do not share U.S. Senator Elizabeth Warren’s ideological views, but we’re also concerned that the stock market’s post-election surge is yet another case of irrational exuberance.
Stocks were already overpriced before the election, yet the market was up 5.4% for the month of November. That’s not going to continue for four more years.
Stephen Moore, a senior economic advisor to the Trump campaign, is not surprisingly among those comparing Trump with Reagan. As he wrote in RealClear Policy, “After the election of Ronald Reagan in 1981, the U.S. Economy experienced one of its greatest booms in history. The growth rate averaged nearly 4 percent for seven years 1982–89. And the stock market rose from less than 1,000 on the Dow to more than 10,000 over the next two decades. This was a period of wealth and job creation that the nation and middle class had seldom seen before. All the liberal critics wrongly said it could not and would not happen.
“Now the question is: Could it happen again in this era of massive government debt, meager growth, and flatlined incomes for the middle class? The answer is ‘yes.’ With the right set of policy fixes, we can see a return to wage gains, higher profits (which means a bull run on stocks), and rapid growth in output.”
Today’s Stock Market
Moore’s comments should be considered in the context of today’s stock market. First, note that Shiller’s cyclically adjusted price/earnings ratio (CAPE) as a mean average for all stocks since 1870 is 16.7. Today, it’s at 27.2, which puts it historically in the 95th percentile. When the Reagan rally began in August 1982, the CAPE was just 6.6, which is in the fifth percentile.
“Even conceding some drawbacks in the CAPE measure,” Neil Howe, author of The Fourth Turning, noted, “it’s fair to say that a Trump boom pushing equities ever higher into 2017 is a very risky valuation bet.”
It’s not just that President Trump will be starting with a benchmark that’s at the opposite extreme of what it was when Ronald Reagan became president. The stock market is also at risk because the allegedly nonpartisan Federal Reserve Board, which has goosed the market to new heights by keeping interest rates near zero throughout the Obama Administration, is almost certain to begin raising rates at its December meeting.
As rates increase, the stock market is very likely to return to normalcy, with prices reflecting corporate performance instead of Fed actions. Long-term, that will be a good thing, but the transition could be painful for investors in both stocks and bonds, since bond yields generally increase along with interest rates, which will make current, lower-yield bond holdings less valuable.
What about the Economy?
While it’s highly unlikely that the stock and bond markets will equal or outdo their performance of recent years, even if President Trump and the Republican Congress are able to pass pro-growth initiatives, the new administration could have a positive impact on the economy.
Like the stock market, President Trump’s economic performance should be considered in the proper context. President Obama presided over one of the longest recoveries in history, yet even as the recovery passes through its 89th month, it has been disappointingly weak. Throughout the period growth has stalled at around 2%, while the historical average post-World War II is 3.3%.
One reason for the stagnation is that economic freedom in the U.S. eroded under President Obama, who relied on executive orders to produce a record number of new regulations.
Adding to today’s regulatory problems, President Obama will attempt to outdo the Clintons during his final days in office. The Clintons pardoned pals like Marc Rich and stole White House furniture, while staff members defaced public property by removing “Ws” from keyboards. Obama, though, is spending his final days passing as many new regulations as possible.
As The Washington Post noted, “Given the fact that each rule reversal takes up 10 hours of floor time in the Senate and that senators must also confirm key political nominees and pass a budget, (one GOP aide) estimated that Congress was likely to overturn between five and seven of Obama’s last rules.”
However, the Congressional Review Act empowers Congress to repeal any regulations passed within the final 60 legislative days of its previous session by a simple majority vote. We’ll find out how bipartisan the new Congress is should President Trump take advantage of the act.
In addition, President Trump should benefit from soon-to-be-former Senate Majority Leader Harry Reid’s emasculation of the filibuster. Because the filibuster has been nullified, Republicans should find it easier to get their nominees accepted once King Harry gives up his throne. Of course, Democrats and the media will be shouting about how unfair this is, even though there wasn’t even a whisper about the unfairness of the uber-partisan Obama administration’s edicts and Harry Reid’s dictatorial reign.
Tax Reform and Deregulation
Tax reform and deregulation should help President Trump achieve his goal of 4% growth, but depending on how his stand against current trade agreements plays out, the U.S. could see continued economic stagnation.
It’s encouraging that the economy grew at an annualized rate of 3.2% for the third quarter of 2016, according to the second estimate by the U.S. Commerce Department. That’s up from a piddling 1.4% growth from the previous quarter and is the highest growth rate in two years.
But keep in mind that the current economic expansion is long in the tooth. It’s already the third-longest recovery in history.
Howe makes the point that business is cyclical and the impact of the president on the economy is limited; unless the recovery hits a new record for length, a recession will take place during the Trump presidency. The current record is 120 months for the period March 1991 to March 2001.
There’s also the impact of debt to consider. The federal debt is approaching $20 trillion and the U.S. Congressional Budget Office projects that the annual deficit will increase from $438 billion today to $1.243 trillion in 2026.
“Back in 1980,” Howe wrote, “total federal debt was near its all-time post-Depression low (31% of GDP) and total nonfinancial debt was similarly subdued (140% of GDP). There was, in short, a lot of unused debt capacity—and Reagan used it. By 1992, the Reagan-Bush administrations had pushed those two numbers up to 61% (roughly doubling the size of the national debt) and 185%, respectively.
“Today, after two later debt-fueled presidencies (GW Bush and Obama), those figures have been pushed up further. Total federal debt is now at 105% of GDP, a level only exceeded at the height of World War II; and total nonfinancial debt is now at 245%, a level with no precedent. Reagan, in other words, started out at a moment of historically light debt—and Trump is starting out at a moment of historically heavy debt.”
The Obama administration has added IOUs for student debt, ObamaCare, the supplemental nutrition assistance program (SNAP) and other government programs at a time when a record number of retiring Americans will be relying on Social Security and Medicare.
It’s going to be an interesting four years.