Trump's Protectionist Policies To Impact Global Supply Chains, US Stock Markets

Shiller Jan17

Wall Street’s post-election rally suggests that many investors currently have the wrong idea about Donald Trump. They have decided he is a new Ronald Reagan, with policies that will deliver a major bull market.

But those promoting this narrative have forgotten their history. Both men certainly share a link with the entertainment industry. But Reagan took office towards the end of one of the worst recessions in the 20th century. By contrast, Trump takes office at the end of an 8-year bull market.

Prof Robert Shiller’s CAPE Index (based on average inflation-adjusted earnings for the past 10 years), provides the best long-term view of the US stock market, going back over a century to 1881.  As the chart shows:

  • Ronald Reagan took office in January 1980, when the CAPE Index was 9.4
  • It fell to 6.6 in July/August 1981 at the bottom of the recession, when the S&P 500 was just 109
  • At the end of Reagan’s Presidency it was still only at 14.7, and the S&P 500 was at just 277
  • Today, Donald Trump takes office with the CAPE ratio at 28.5 and the S&P at 2271, after an 8-year rally

Is it really credible as a Base Case that the rally could continue for another 8 years?  After all, Trump himself claimed back in September that the US Federal Reserve was being “highly political” in refusing to raise interest rates:

They’re keeping the rates down so that everything else doesn’t go down. We have a very false economy. At some point the rates are going to have to change. The only thing that is strong is the artificial stock market.”

Common sense would also tell us that Trump is about to make sweeping changes in economic and trade policy.  He made his position very clear in October with his Gettysburg speech.  And his Inauguration Speech on Friday explicitly broke with the key thrust of post-War American foreign policy:

We assembled here today are issuing a new decree to be heard in every city in every foreign capital and in every hall of power. From this day forward, a new vision will govern our land. From this day forward, it’s going to be only America first, America first. Every decision on trade, on taxes, on immigration, on foreign affairs will be made to benefit American workers and American families.

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Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this ...

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