Policies vs the Economy
Once the election was over, I asked myself, so now what? I’ve done a lot of reading since last week, not only in regard to the election, but also with respect to investing and what kind of impact the Trump presidency could have on the investment world. Fortunately, we can look back at his previous four years (2017-2020) and see if that time frame can offer us any clues. But first, let’s look back at the past four years and see how economic policies affected the economy.
Bidennomics
In my last post, I talked about how the current occupant of the White House typically does not have a long-term effect on the markets:
The long-term trend suggests that the stock market’s performance may have more to do with the overall strength and resiliency of the U.S. economy than the person who sits in the Oval Office.
That’s not to say that the president can’t have a short-term effect. One of my favorite economists, Cullen Roche, laid out one of the biggest mistakes the Biden-Harris administration made over the last four years that created some of their re-election problems in his column dated 11/7/2024: www.disciplinefunds.com. That mistake was in printing $7 trillion during Covid and then telling us it had no impact on inflation. I agree that some initial stimulus was necessary, but continuing to feed dollars into the system was a mistake.
- You can’t inject that much money into the economy and think it won’t drive up consumer prices. In turn, the Federal Reserve had no choice but to begin to raise interest rates in order to combat skyrocketing inflation.
- Despite the money pump from the White House, working class/middle class wages did not keep up with inflation, and people fell further and further behind each month.
The other mistake that has had an impact and creates a problem for us now is that over the last three years, the government has created 1.5 million jobs. That’s 42K jobs per month created by the government. Removing government jobs from the last six months of payroll reports, you end up with an average of 100K jobs created per month. October’s report would have been -30K jobs without government hiring. Considering the government doesn’t actually produce any products, one might say the created jobs are illusionary.
Despite what I would consider some bad decisions made by this administration, from an investment point of view, the S&P 500 was still up around 52% from January 2020 to today.
Trump’s First Four Years
President Trump came into office promising to cut taxes and implement tariffs on foreign goods, which can have an inflationary impact on the economy. Despite what was expected, Trump’s first four years were not inflationary. Personal Consumption Expenditures (PCE Index) averaged only 1.7% in spite of the tax cuts, deficits and tariffs. The S&P 500 was up around 70% despite the Covid scare in early 2020.
Below is a chart of the S&P 500 over the last eight years showing the beginning and ending price level of each administration.
Trump’s Next Four Years
What can we expect economically from this new Trump administration? The market took a significant jump the day after the election, but with the markets at all-time highs and in overbought conditions, I’m not sure we will hold those gains in the short-term. To me, it seemed more like an emotional reaction rather than a reaction to some positive economic news. If his next four are anything like his first four, then I think we can expect:
- Pro-business policies – Create more jobs and drive up wages.
- Tax cuts – Could mean larger budget deficits.
- Tariffs – Create more inflation. In the past Trump has successfully used the threat of tariffs as a negotiating tool without actually imposing them, so let’s wait and see what happens here.
- Cutting red tape for small businesses – More jobs and higher production.
- Eliminating a large number of government jobs – Labor markets trying to absorb all these jobs could really slow down inflation but also slow down wage growth and GDP.
Trump passed large tax cuts and imposed some tariffs during his first four years, and it didn’t affect inflation, as previously noted, so, until more specifics come out, let’s not assume what the effects will be. He is coming into his second term with a lot more economic problems than he did the first time. With the markets being overbought and hovering around all-time highs, he could be in for a rough start this time. But until we see more of the specifics of his proposals and what actions he actually takes; I’m going to hold judgment.
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This post is for informational purposes only. It is not intended as investment advice as each person’s financial situation is different. I strongly recommend working with a financial advisor who can deliver current information to you quickly and offer help with sorting through the various investing options. Bret Wilson is a Financial Advisor with Wilson Investment Services, based in Rockwall, Texas.
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