Will the investment environment under President Trump be Reagan or Hoover revisited, asks Nancy Curtin.

As investors considered the unexpected news of the Trump victory last year it was clear they would be faced with a barrage of news to digest. 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 1930s 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 Reagan also came to power as a nonestablishment president. Many doubted the ability of the former Hollywood actor to accomplish much. He was seen as a buffoon and hardly fit to hold the highest office. 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 quarter two 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 per cent to 5.8 per cent of GDP. In most of the Reagan years, military spending was about 6 per cent of GDP.

During Reagan’s first term, real GDP growth soared to over 7 per cent year on year following the 1982 recession, before slowing to a robust average of 4 per cent for the remainder of his term. While the government deficit tripled to nearly 6.0 per cent of GDP (unheard of at that time), real GDP per working-age adult increased by 14 per cent 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 cent 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. 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.

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 1,000, and by 1987 it peaked at 2,722.42, a 3.5x increase in share prices.

Could something similar happen again? 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.

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, 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 per cent 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.

Nancy Curtin is chief investment officer at Close Brothers

Charity Finance wishes to thank Close Brothers for its support with this article