An Honest Look at Presidential Stock Market Returns

I put together this table of Presidential returns to illustrate how obscene the stock market bubble in Trump’s first 2 years has been. In putting together this analysis, I don’t use the dates when a President has come into office to calculate the presidential returns because the market tends to front-run the policies of a president before he takes office. The market rise from November 2016 to January 2017 had nothing to do with Obama’s economic policies and everything to do with Trump/GOP plans for a massive corporate tax cut. In addition, I don’t look at where market prices were on Election Day, but instead I look at what is the “net addition” that a President has been able to achieve over the prior president. To do that, I take the maximum S&P 500 (SPX) price achieved under a president and then calculate the difference on top of the max SPX price achieved under the prior president. For example, this table doesn’t give Obama full credit for the recovery of the stock market. It only gives him credit for gains he was able to build on top of Clinton’s stock market gains. This analysis also doesn’t give Bush 43 any credit at all because the stock market under him was flat and the best he could do is return it to Clinton-era all-time highs in 2007.

When you look at Presidential returns in this light, in 2 years, Trump has gained almost as much as Obama did in 8 years. Trump has gained more than Bush 41, Carter and Nixon in 20 years combined. The gain per year under Trump has been 17% per year which is double the long-term SPX annual average (8%) and 3^rd only to Reagan and Clinton. However, I need to mention that both Clinton’s and Reagan’s great stock market gains came in their 2^nd terms. Reagan and Clinton both had to deal with a recession at the start of their presidencies. They had to work to get their stock market gains.

Regardless of whether it was Trump or Hillary Clinton in 2016, the market was expecting a significant corporate tax cut to bring US rates in line with the rest of the world (around 25%) and the market was going to rally on that tax cut. If Obama had done it, the stock market gains we see today under Trump would have happened under Obama. As such I view Trump’s stock market gains as undeserved. The tax cut was expected. The question is what lies going forward.

Tax cuts and particularly corporate tax cuts inevitably animate the rich vs poor public debates and make progressives more active in politics. You see more worker strikes, work stoppages and more demands for higher wages and for more government benefits. Every action has a counter-reaction. If the rich get richer from a government handout, the poor will want to get richer from a government handout next. When the rich get a government handout, they hoard the money or invest – resulting in low inflation. But when the poor get a government handout, they spend it – which results in high inflation.

 

High inflation is the greatest enemy of the stock market. After Nixon/Ford ignited the progressive movement in the late 60s/early 70s, the US saw great inflation that obliterated stock market returns. In 12 years under Nixon/Ford and Carter, the US stock market advanced a total of 36%, barely 3% per year. Most of the time, the market was in a heavy drawdown. Inflation advanced 100%+, however, resulting in massive negative inflation-adjusted returns for stocks. Under Nixon/Ford the SPX lost -49% in 8 years on real basis or -6.2% per year! Under Carter, during the final hyperinflationary phase, the SPX lost -9% per year! Under Nixon/Ford/Carter the stock market basically lost all of its real value, going down -85% in real terms. Bush 43 also saw inflation triggered by a massive wave of liberal activism which was compounded by his ill advised housing bubble policies. The Bush 43 housing bubble inflation led to a flat market which also meant that he saw a negative real market return of -2.9% per year. Inflation is indeed the scourge of the stock market. 

 

Keep these Nixon/Ford/Carter/Bush 43 negative real stock market returns in mind when people on TV advertise the stock market as an inflation hedge. Stocks are not an inflation hedge. Repeat: STOCKS ARE NOT AN INFLATION HEDGE. Inflation obliterates profit growth and compresses the market multiple dramatically resulting a in a double whammy of bad news for stock market prices. Nominally the stock market may thread water, but in real terms your money is being obliterated. In the 70s, in real terms you lost all of your money if you stayed invested in the stock market. In times of higher inflation, the Treasury Yield Curve is heavily inverted and only cash (short-term treasuries) and gold/real assets manage to preserve wealth. The traditional 60/40 portfolio of stocks and long-term bonds tends to suffer disproportionately because institutional investors abandon both stocks and bonds because of their high expected volatility. We are at the onset of such a period – very likely to last one to two decades as President Trump’s extremist conservativism is the trigger that makes many Americans seek refuge in progressive liberalism.

 

Long story short, Trump is waking up the great obliterator of stock market returns – liberal activism and inflation. His stock market gains so far are unearned – the corporate tax cuts would have happened with or without him – and by the end of his term he will join other Republican Presidential failures with negative real stock market returns despite his best efforts. As it stands right now, this is the most obscenely overvalued market in US history with SPX market cap at nearly 4 trillion over US GDP – a discrepancy between stock market cap and real output of the US economy that has never been observed under any other US president. In recent years, the US GDP averages about $700 billion in nominal GDP addition per year. At current stock market prices, we have already priced in the US GDP output for the next 6 years. Trump’s 2^nd term has already been priced in by stock markets. In fact, the potential US GDP output of both Trump terms were already priced in January of 2018! If we do have a market meltup from here, we will be front-running decades of US economic output. As we saw with Japanese stock market bubble in the 80s, this is a dismal prospect for US stock markets in the future. And worse yet, a dismal prospect for the next generation of US savers. 

 

Blue State Wage Hikes

President Trump likes to brag about the wage gains of average workers during his time in office. Indeed, the 1^st quartile of workers (lowest earning 25%) have seen the greatest relative wage gains in the economy since 2018 with wages going up at 4.4% at present and outpacing the upper quartiles (according to the Atlanta FED Wage Growth Tracker). Trump likes to link his tax cuts to the wage gains for bottom tier workers. Unfortunately, the wage gains at bottom tier are not due to the tax cuts signed by Trump, but due to minimum wage laws enacted in many Democratically-leaning states (or as many in the US call them “Blue States” for the color “blue” associated with the Democrat Party). I compiled a list of all major states that have enacted minimum wage increases in the table below. This list covers 16 states which have a combined population of 171 million people, more than half of the total population of the United States. We have California, New York and Illinois on that list and even Florida which probably doesn’t strike anybody as a hard-core Blue State but nevertheless it is a state that mandates cost-of-living adjustments to the minimum wage (adjust the minimum wage according to the consumer price index). All major coastal states where majority of the US population lives is in this list. In those states, minimum wages are scheduled to rise on average 4% in 2018, 5.3% in 2019, 8.4% in 2020, 5.6% in 2021 and 5.2% in 2022. Many states have wages jumping $1 each year until the wage reaches $15 (modeled after Bernie Sanders’ legislation), other states have more modest increases, but in many situation at minimum cost-of-living adjustment increases are being made. Many other not-so blue states like Pennsylvania are also in the process of discussing and enacting minimum wage hikes. In the list below, I have listed only the states that have already passed minimum wage legislation (or in the case of Connecticut, legislation that will be signed imminently by a Democratic governor and legislature).

In 2016, nobody expected Trump to win the Presidency. Most blue states had postponed minimum wage legislation on the assumption that Hillary Clinton would raise the federal minimum wage which hasn’t been updated since 2009. After the Trump win and with the White House blocking Bernie Sanders’ “Raise The Wage” legislation to raise federal minimum wage to $15 by 2024, Blue States took matters in their own hands and raised wages at the state level themselves. While it is true that Trump’s corporate tax cuts have allowed for minimum wage increases to occur in the economy so far without significant layoffs by major corporations, Trump can’t claim that his tax cuts are what propelled wage increases. The tax cuts by Bush in 2001 and 2003 clearly didn’t spike the relative increase in 1^st quartile wages that we see today. Corporations will not raise wages unless they are forced to and it is naïve to think that with employment participation ratio still at 40 year lows, low-wage workers have any semblance of bargaining power. The relative increase of 1^st quartile wages we see today can only be explained by activist legislation in the major Blue States. As much as Trump likes to brag about the economy, the lower to middle class prosperity we have observed so far is more due to the actions of state governments where legislatures are dominated by the Democratic Party.