Download US Election one week on: will President Trump`s administration be

Investment Insight
November 2016
Will President Trump’s Administration
be more like Reagan’s or Hoover’s?
By Nancy Curtin, Chief Investment Officer at Close Brothers Asset Management
As investors continue to digest the unexpected news of the Trump victory last week,
they will be faced with a barrage of news to digest in the months ahead. However,
it is perhaps worth stepping back and putting Trump’s declared policies into an
historical context.
Trump’s proposed programme of change, at least on the economic side, recalls the Ronald Reagan era. However, his
protectionist stance harkens back to the 1930’s and Herbert Hoover. The two presidents had diametrically opposed impacts
on growth, equity returns and employment. Like Trump; the 40th President of the United States Ronald Reagan also came
to power as a non-establishment president. Many doubted the ability of the former Hollywood actor to accomplish much.
He was seen as a buffoon by many and hardly fit to hold the highest office in the land. However the mood was ripe for
change as Americans had been crushed by years of “stagflation” – a period of slow economic growth and high inflation
throughout the late seventies. By 1979 Fed Chair Paul Volcker had begun raising interest rates in a bid to break the back of
inflation, but curbing inflation came at the cost of growth and the “misery index” (the rate of unemployment plus the rate of
inflation) continued to surge, reaching an all-time high in Q2 1980.
The fiscal fillip
Against this difficult backdrop and with the US economy slipping into recession, President Reagan came to power in
January 1981 with his own form of supply side, fiscal stimulus – “Reaganomics”. The four pillars of Reagan’s economic
policy were to slow the growth of government, reduce federal taxes on income and capital gains, roll back government
regulation, and increase public infrastructure spending.
Part of Reagan’s success in economic reform was no doubt due to his highly capable advisers, such as White House Chief
of Staff James Baker and Treasury Secretary Donald Regan. His cosy relationship with Tip O’Neill in Congress was also
seen as one of the great examples of a President and Congress working effectively together.
While a near-miss assassination attempt two months into his presidency meant that Reagan did not sign his first bill until the
end of March 1981, he was able to implement significant reforms that same year. As early as February 1981, he had sent to
Congress significant revisions of budget and tax policy. Through the Economic Recovery Tax Act of 1981, Reagan began
the series of across-the-board tax cuts and increases in public spending that were to be the cornerstone of his government.
Like Trump, Reagan also set out to increase defence spending. Defence spending rose from 4.9% to 5.8% of GDP. In most
of the Reagan years, military spending was about 6% of GDP.
During Reagan’s first term, real GDP growth soared to over 7% year on year following the 1982 recession, before slowing to
a robust average of 4% for the remainder of his term. While the government deficit tripled to nearly 6.0% of GDP (unheard of
at that time), real GDP per working-age adult increased by 14% during the Reagan administration. The increase in nominal
productivity growth was even higher: output per hour, which had been roughly constant in the Carter years, increased at
10% per annum in the Reagan years. Employment and labour participation rates also dramatically increased.
Market participants are no doubt wishing that Trump will implement fiscal stimulus with equal success. The chart overleaf
shows GDP growth before and during the Reagan era in grey, alongside GDP growth between 2011and 2016 in blue. While
the US economy is not currently suffering from “stagflation”, growth in recent years has been anaemic, and has trended
down over recent quarters. An effective loosening of fiscal policy could sustain a longer recovery.
US GDP growth – Reagan era vs. today
Source: DataStream, CBAM.
The Reagan bull market
Unsurprisingly, the Reagan regime’s fiscal package, combined with controlled inflation, ushered in one of the greatest bull
markets of that time. The era effectively created a sea change in growth and earnings expectations and the markets loved
it. On 12 August 1982, the US index closed at a low of just 776.92. Before the end of that year, the index had surged past
1000, and by 1987 it peaked at 2722.42, a 3.5x increase in share prices.
Could something similar happen again?
The chart below superimposes the Reagan years (in grey) on current stock market trends (in blue). Before Reagan much
wealth had been concentrated in the hands of the few. Policies got money in the hands of people with a greater propensity
to spend than save, as well as encouraging broader stock market participation. Soaring returns on the stock market
increased consumer confidence and generated unprecedented wealth, in turn supporting the economy.
US Equity Index
Source: Bloomberg.
Some pundits believe that Trump will be a staunch advocate of change, that he will be keen to keep the recovery going and,
in so doing, avoid a recession ahead of the next election in 2020.
A protectionism prototype
While fiscal stimulus will be welcomed by investors, concerns linger over Trump’s other electoral promises. Putting aside
social issues, the largest threat to economic growth could well be his promise to “put America first” through controlling
imports.
Historically, such policies have not been successful and a similar policy led to a deepening of the 1930 US depression.
Herbert Hoover, the 31st President of the US, had tried to combat the downturn not only with large-scale government public
works (projects such as the Hoover Dam) but also measures designed to protect American workers. The latter did not work
so well.
The Smoot–Hawley Tariff Act of 1930 raised tariffs on over 20,000 imported goods. Hoover’s aim to make imports so
expensive that Americans would buy only American-made products severely backfired. Foreign trading partners retaliated
with similar measures and American trade fell by over 70% while world trade halved. Hoover was credited with accelerating
the depths of the Great Depression, served only one term as a Republican and lost the 1932 election to Democrat Franklin
D. Roosevelt. His legacy was as the man who accelerated an economic downward spiral. He is little revered and less
remembered in American History.
Conclusion
A Reagan style fiscal reflation could be just the tonic the world needs. However a Hoover style protectionist programme
might be just the misstep the world fears. It is also not clear that closing borders will bring back jobs as global supply chains
are well entrenched and as automation plays such a large role in decreasing the importance of labour in manufacturing
today. President-elect Trump has said he is open to compromise on trade.
The first 100 days are critical and will no doubt give some clue as to how Trump wants to be remembered.
Important Information
The information contained in this document is believed to be correct but cannot be guaranteed. Past performance is not a reliable indicator of future returns. The value of
investments will go up and down and clients may get back less than invested. Opinions constitute our judgment as at the date shown and are subject to change without notice.
This document is not intended as an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation. Where links to third party websites are
provided, Close Brothers Asset Management accepts no responsibility for the content of such websites nor the services, products or items offered through such websites.
Close Brothers Asset Management is a trading name of Close Asset Management Limited and Close Asset Management (UK) Limited. Both companies are part of Close
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