With the uncertainty of President-elect Donald Trump’s vague policies leaving economists wondering what the US economy will look like under a Trump administration, history may give us some clues.
According to Jeremy Hale, Graham Bishop, Maximilian Moldaschl, and Amir Amin — the asset allocation strategy team at Citi — a Trump presidency will probably go something like the Reagan years in the 1980s.
“Regardless, markets have started to price this in, and we think a shift in our base case is also due,” said a note to clients from the team. “The 1980-84 episode may be of some use as a starting point for a historical comparison.”
There are 4 economic scenarios the team sees playing out similarly to 1980-1984:
- Stronger US dollar: “FX markets priced in the combination of fiscal easing/higher bond yields/hawkish Fed and a broad USD uptrend ensued, lasting for several years,” said the note.
- Fiscal stimulus: : “Double dip recession in 1980 & 81/82. Fiscal easing in two waves. Both starting during the respective recessionary periods, but fuelled by a widening deficit and not just a drop in the denominator,” said the Citi team.
- Bond sell-off: Bonds “sold off on the back of fiscal ease, but also on aggressive Fed tightening,” according to the note.
- Equities jump, but then fall longer-term: “Initially traded higher in 1980, but sold off soon into the 1981 recession as earnings dropped and Fed hikes became too aggressive,” said the Citi strategists. “Only thereafter — once the budget deficit really took off, the Fed stopped hiking and the recession ended — a lasting and strong equity rally entrenched.”
So far, the reaction seems to be in line with the strategists’ comparison. Bonds have sold off, the dollar hit its strongest levels since December, and stocks have popped with a new all-time high for the Dow Jones Industrial Average. The fiscal stimulus and recession remain to be seen.
“More specifically, judging by the historic precedent, investors should monitor the risk of the Fed tightening too much in response to fiscal stimulus and killing off the associated recovery,” said the note. “Indeed, note how after a short lived pull back short end rates have repriced higher and the Fed Funds Futures strip is already pricing more Fed hikes than pre-election.”
The Citi team did note that there were some key differences between the early 1980s and now that could impact how the market will perform. From the note:
“A key difference is that fiscal stimulus may now occur outside of a recession, suggesting that risky assets should be all else equal more supported. But valuations are also very different. In 1980, US equities traded on a (Shiller) P/E of 6.5x compared to a P/E of 24.2x now! Years of monetary policy support & QE driving valuations higher means starting points are very different.”
A word of warning, however, as the Citi team put it, “As always, historic returns are not an indication of future performance.” Additionally, given the way Trump has changed positions in the past, it’s unknown what parts of his agenda will get done.
Finally, Reagan had strong bipartisan support and won 44 states in the 1980 election. Trump lost the popular vote and carried 30 states, so Trump’s mandate is probably weaker.
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