Why Donald Trump's Market Rally Echoes Ronald Reagan's
Donald Trump's election has sparked a stock market rally. Will it continue? The canny Nicholas Atkeson and Andrew Houghton, co-founders of US Capital Wealth Management in San Francisco, see parallels between Trump’s market impact and that of Ronald Reagan:
In November 1980, Ronald Reagan was elected president over Democratic incumbent Jimmy Carter. Americans decided that the country, driven by economic distress and international embarrassment, needed a big change and that Reagan's conservative, government-is-the-problem philosophy was worth a try.
Reagan decided to focus on economic issues first and foremost. In February 1981, he sent to Congress what some political scientists called some of the most sweeping revisions of budget and tax policy ever attempted. The cornerstones of his plan were an across-the-board tax cut and an effort to reduce the size and growth of the federal government."
Trump's Make America Great Again economic proposals of cutting taxes, reducing non-entitlement and non-military spending (the "Penny Plan") and increasing military and infrastructure spending are similar to what Reagan proposed but substantially larger.
Given the similarities in the economic agendas of the Reagan and Trump, we thought it might be instructive to look at the history of the S&P 500 index a month before the election through the end of the first 100 days of the presidency.
Donald Trump: could the market follow Ronald Reagan’s cue?
Casual observation indicates there are similarities between how the stock market reacted to Reagan and how it is reacting to Trump. In the weeks before the election, the market depreciated. In the five days following the election, there was a sharp market rally.
During the first five trading days post election, the S&P 500 advance about 2% with both Trump and Reagan. The S&P 500 continued to appreciate through late November following Reaga's victory. From the election to the November peak, the S&P 500 advanced by almost 9%.
We have yet to see how the market will perform with Trump from now through the first 100 days. There are reasons to believe that the stock market will show better returns initially with Trump than it did during the early days of Reagan’s presidency.
- When Reagan was elected, the 10-year Treasury rate was about 12.7%. Over the next year, it rose to 15.8%. Stagflation was stifling growth. On November 8, 2016 when Trump was elected, the 10-year treasury rate was about 1.86%. It is now 2.28%. Low rates today encourage spending and growth. Even as rates rise today, they remain very low and may be signaling accelerated economic growth. These two presidents most likely bookmark the all-time high and low in interest rates.
- Reagan took office in January 1981. By July 1981, the U.S. economy was officially in recession. As Trump takes office, the economic data suggests growth is accelerating and there is a very low probability of recession in 2017.
- Trump’s stimulus plan of $500 billion plus per year is substantially bigger inflation-adjusted than what Reagan proposed.
- In the first 60 days of Reagan’s presidency, he was shot by John Hinckley Jr. It is unlikely any president including Trump will be shot.
From 1965 to 1981, the S&P 500 did not appreciate. During this bear market period, the market suffered a nearly 50% drawdown in 1973 and 1974. By the time Ronald Reagan became president, investor sentiment was very negative. Reagan’s presidency marked the beginning of an 18 year bull market.