Since the election, a newfound optimism about the economy has propelled the U.S. stock market higher. This optimism has led many to compare Trump with Reagan and conclude with similar expectations about economic growth. On the surface, the comparison appears reasonable: both were political outsiders promising to shake up the status quo and both were largely products of worldwide (albeit different) political movements. However, any comparative analysis soon leads to more differences than similarities.
First, Reagan possessed far greater political power and flexibility. The 1980 election was a landslide in his favor: 489 electoral votes to Carter’s 49, 51% of the popular vote to Carter’s 41%. The election would have been even more lopsided absent the participation of the independent John Anderson who captured almost 7% of the popular vote. Reagan possessed the classic political definition of a mandate, whereas Trump had 2.5 million less votes than Clinton.
It is true that, unlike Reagan, Trump will be working with Republican majorities in both houses of Congress, but it is questionable how beneficial this situation will prove to be. While Reagan represented the conservative wing of the Republican party, Trump is largely an outsider within his own party. Already, congressional Republicans are seeking to mitigate Trump’s legislative ambitions. And while Reagan drew the support of many congressional Democrats, Trump is unlikely to gain political defectors in advancing his agenda.
Second, and perhaps far worse than the political situation, the current levels of interest rates and debt inhibit Trump’s economic and budgetary flexibility:
While Reagan inherited a crisis, Trump inherits a crisis in waiting. Until such a crisis manifests itself, we believe Trump will encounter difficulty in enacting any sweeping policies.
For this reason, while the current stock market rally is significant and sharp, it is also coming off of near-record valuations. When Reagan took office, U.S. stocks were unloved and trading at single digit price-to-earnings multiples of 9X versus today’s 27X valuation. Under Reagan, stocks were priced for expected economic misery, but falling interest rates and economic growth lead to rising stock valuations. Under Trump, stocks are already priced for perfection despite the likely headwind of increasing interest rates.
Trump may or may not be the next Reagan as it relates to disruptive policies. Either way, investor returns over the next four years are more likely to be impacted by interest rates and valuations, both of which are near extremes.
Sources: Robert Shiller, St. Louis Federal Reserve.
Notes: PE ratios represent cyclically adjusted price earnings ratios (CAPEs); interest rates represent the 10-year treasury yield; Debt is gross federal debt with the most recent data point as of January 1, 2015, Reagan era data as of January, 1981.
