Former president Donald Trump may well have created a chaotic environment within his administration, but there is no doubt that his four years in the White House, from 2017 to 2021, juiced up investors’ “animal spirits.”
Who knows what his economic vision is going to be, assuming he emerges victorious this November, but what we do know is that
• he measures his success by the direction of the equity market;
• he will use executive powers to deregulate;
• he doesn’t give a hoot about fiscal deficits and is sure to boost spending and either extend his tax cuts or reduce taxes even further, especially for businesses (he added US$8-trillion to the national debt in his four years – he is a classic fiscal expansionist);
• he had no problem pursuing a soft U.S. dollar policy;
• tariffs and other protectionist initiatives are sure to rear their heads (little difference from Joe Biden here).
• he loves inflation and low interest rates (he is, after all, a real estate guy);
• he has made no bones about getting rid of Jerome Powell at the Federal Reserve.
No wonder gold did so well during his tenure, especially in his last two years, when the yellow metal soared nearly 50 per cent. True to form, in his first two years in office, the total return in the S&P 500 was 23 per cent, even with a ton more volatility. The combination of the tax cuts and the Fed’s tightening program caused a bear flattener in the Treasury market – when short-term interest rates rise faster than long-term rates – and moderately negative returns. But the risk-on trade was underscored by the vast outperformance of corporate bonds.
The dollar was weak, and gold held its value.
And with all the drilling, oil prices remained broadly stable.
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What’s interesting is that in Mr. Trump’s last two years, when the GOP lost its grip on Congress, the stock market did even better. The S&P 500 soared 50 per cent – gridlock is obviously good. But even bond yields fell sharply, and Treasury returns were spectacular – the long bond rose almost 40 per cent. Not even his tax cuts, immigration policies, tariffs and a 3.5-per-cent unemployment rate could muster up much, if any, inflation. And the Fed spent 2019 cutting rates. But one common theme was U.S. dollar depreciation and strength in both gold and oil.
Nothing is saying that if Mr. Trump wins the election we will necessarily see a repeat. But what we do know is that he is a big fan of debt and loves a weaker dollar.
The fact that he grades his performance based on the S&P 500 means we will probably need to shift to a more constructive stance on the market if he wins and add some gold to the portfolio while screening all the holdings against U.S. dollar weakness.
David Rosenberg is the founder of Rosenberg Research and the author of the daily economic report Breakfast with Dave.
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David Rosenberg