Stocks rose sharply on Friday in reaction to a stronger than expected employment report and upward revisions to data from the previous two months. Wages also showed solid gains. More people working at higher wages is obviously good economic news and should put to rest any thoughts of recession, at least for now, barring any negative news on the trade front. They will get an additional thrust this morning as leaks from Washington suggest trade talks are going well. While we often hear this said at random times, and it is hard to attach too much credibility to any trade rumors, good or bad, these stories are market moving in the short run.
This morning I want to direct my comments most directly to those who feel President Trump and his policies are going to lead to economic ruin and a collapse in the stock market. Trump haters are much more fearful investors today than Trump admirers. Without remotely attempting to take a side in the pro vs anti-Trump debate, I think it is very important to understand that stock markets react to earnings and interest rates. They react to very little else. They didn’t care that President Clinton was impeached. While the stock market declined as the impeachment proceedings began, it rallied strongly and continued to rally by the time the trial in the Senate began. The stock market did fall sharply in 1973 and 1974 as the drip, drip of Watergate was making headlines. But that was in reaction to the sharpest recession since the Great Depression and escalating stagflation. By the time Nixon resigned on August 1974, the market was already in recovery mode. Economics, not politics dictated what happened in the markets. Watergate didn’t change our economy but expanding the money supply too fast ignited inflation.
It is infuriating to watch President Trump declare he is now a Florida resident after being mistreated in New York knowing full well, along with everyone except perhaps for a few within his base, that he is changing residences because the tax law he signed last year no longer allows the deduction of state and local taxes over $10,000. Florida has no state income tax and New York’s is high. It was a jolt to many to see him pull troops out of Syria against all military advice. But markets are simply not affected by Syrian politics or impeachment proceedings or quid pro quo or crude tweets. Some or all of the above may infuriate many. Some infuriate me. But they aren’t going to change the economic realities.
The realities of today are as follows:
- Our economy is growing at the same 2% it has been growing at for the past decade. Any benefit from the tax cuts or accelerated government spending has been offset by slower trade and investment. Yes, the last two factors may be scored as Trump faults, but the first two are Trump positives. So, let’s call it about even in economic terms.
- Inflation remains almost non-existent largely because there is too much capacity worldwide. Trump has nothing to do with the excesses.
- Resulting low interest rates have been a help to owners of financial assets.
- Corporate earnings have been flat for the past four quarters. While expectations are for some improvement ahead, that is likely to be muted and it will depend, in part, on any changes in tariff policy. To that extent, Mr. Trump bears watching.
- The outlook for next year, in economic terms, isn’t remarkably good or bad. Earnings might move a bit higher, inflation doesn’t appear likely to move much in either direction, interest rates should remain low, meaning they could rise or fall a bit from current levels, and no recession is in sight.
- Frankly, markets are more fearful of some of the Progressive Democratic tax and spending policies than they are about the economic future in a second Trump term of office.
I say all this because clients who view Trump neutrally or positively have a very different investment perspective than those who feel he is a clear and present danger. The media, which means MSNBC, CNN and Fox, the three major networks, and leading newspapers like The Washington Post or The New York Times, overplay almost every story. Their job is to hook us, to make us tune in 24/7. They all learned long ago, that the middle ground is boring and doesn’t produce the highest ratings. But the economic reality is that what really moves our world are forces beyond government control. Big changes require legislative action. Over the past decade, except for Obamacare and the Trump tax cut, there has been very little done legislatively and nothing is expected between now and the 2020 election. Presidential Executive Orders can matter around the edges, but they don’t stand the test of time. There is a long history of Presidents undoing Executive Orders of their predecessors. Yes, the President can start wars (that certainly would be disruptive) but, in Trump’s defense, it is clear he doesn’t want to do that.
That leads me to the progressive agendas. Senator Elizabeth Warren outlined how she would pay for Medicare-for-all last week. I don’t want to tear it apart but it is a pipe dream. There is no way her funding plans will generate anywhere near the revenue she would need to fund such a program. Let me give you just one example. She wants to tax billionaire’s wealth. Therefore, no one will want to be a billionaire. How does one avoid that? By splitting assets into various parts. If you are a billionaire, divide your assets between you, your wife, and your kids. If that isn’t enough, set up trusts to slice and dice the pie further. I don’t have the details and Senator Warren hasn’t provided them either. But suffice it to say that if the rules are written, smart lawyers will find their way around them, if not in whole, at least in part. What that will mean is that funding for her plan will come up short without taxing the middle class. Guess what? The middle class probably knows that. So do Democrats in Congress who will be asked to vote for such a plan. That is probably why Medicare-for-all, at least the variety proposed by Senator Warren, isn’t going to happen as proposed.
I am not trying to play politics. All I am trying to do is stimulate thought that, economically, Mr. Trump may be less dangerous than those who dislike Trump believe. But the real question, as we move into 2020, is whether he is more dangerous than the alternatives. That answer will go beyond economics and is beyond the scope of my letters.
I started this note focusing on the fears of those who distrust Trump. Their fears are holding them back from investing in stocks. I think, at least at the moment, those fears are somewhat misguided. I think our President, without major legislative action, simply doesn’t move the economy in a major way. He can tweet, he can taunt, he can threaten, but he can’t make a huge difference except with tariffs. He knows 2020 is an election year. He may make threats and, short term, he may even increase tariffs, but it is hard to believe he wants economic chaos next summer or fall.
For the stock market, the Trump alternatives are wide ranging and, in time, will become important considerations. But for now, it is still a Trump world, at least to the stock market. And whatever you think of him, economically he isn’t doing all that much harm or good. As always, demographics have a more profound influence on markets than Washington politics.
Today, Sean Combs is 50 as is Matthew McConaughey. Ralph Macchio, the Karate Kid, is 58. Kathy Griffin turns 59. Finally, Laura Bush is 73.
James M. Meyer, CFA 610-260-2220