I’ve updated my Keeping Score page for S&P performance in June, 2Q20 and the year to date. Looking back, much of overall first-half performance looks ho-hum. We know better, though.
As I’ve mentioned once or twice before, a former work colleague of mine was writing, presciently, as early as 1990 that neither major US political party had much relevance for ordinary Americans any longer. Democrats had a social justice program but no economic strategy; Republicans didn’t stand for much of anything, and were in danger of being captured by religious cultists.
damage from Trump
It’s thirty years later, and the basic story remains true, I think. It has set the stage for the election of Trump, an inept and unsavory businessman with anti-science and white racist views plus a fondness for dictators, especially Vladimir Putin. His campaign, to put the best face on it, called for revitalization of the South and Midwest, areas hurt by the demise of basic industry over the last half-century and abandoned by both parties, through a return he fantasized for the country to the world of the 1950s. Despite the fact that this “solution” is flat-out crazy, rank-and-file Republicans fell right in line with Trump’s idea. Many independents, too.
The results are about what one might have predicted: economic growth had slowed to close to zero even before the pandemic, foreign investment into the US was drying up; domestic firms were shifting operations abroad to escape his white racism that precluded hiring many highly skilled foreigners. In my view, we have only begun to feel the negative economic effects of his blundering. And in vintage Trump form, he has hurt most badly the people who have trusted and supported him.
The most visible damage to date from the Trump administration, however, is its epic coronavirus failure. More than simply pandemic denial, Trump has politicized routine safety precautions, like wearing a face mask, turning them into partisan political statements impermissible for his followers to make. The result has been a domestic death toll so far that’s horrifically higher than elsewhere, and pandemic cases reaching new peaks here while the rest of the OECD is at maybe a tenth of the March-April highs.
if Biden wins
If Biden wins, repairing the damage from Trump’s extending and deepening the pandemic-induced domestic downturn will be his first, and most difficult, priority, I think.
The counterproductive Trump tariffs were put in place by executive order, so they can presumably quickly and easily be reversed. The damage to the US “brand” can also be repaired to some extent by ending Trump’s anti-foreigner and anti-diversity measures.
On the other hand, the US is way worse off than it was four years ago. In addition to the unnecessary suffering and loss from the pandemic, creaky domestic infrastructure is four years older. The tax system remains unreformed, unless we call lowering taxes for the ultra-wealthy a “reform.” Because of this, the federal budget was in deficit before coronavirus-related spending. Now it’s worse. Also, as I mentioned above, in true Trumpish fashion, nothing has been done about the legitimate grievances of Americans left behind by structural change.
In short, there’s lots to do, both promises not kept and new messes made.
Government finances put into disarray by Trump will eventually have to be repaired. This process can be gotten to voluntarily or, unfortunately the more likely case, through an eventual crisis of confidence–a decline in the dollar or a refusal of professional investors to buy Treasuries. That could be years down the road, however–I truly have no idea.
the Wall Street worry: higher taxes
The front line, but specious, anti-Democrat argument is the Republican staple that Democrats raise taxes. The facile, but correct, I think, counter is that higher taxes on rising income is a better situation all around than lower taxes on lower income. We already have the latter now, with little of the really permanent economic damage Trump has put in motion having kicked in yet.
Will a Biden administration have the willingness to really reform the tax system by attacking entrenched special interest tax breaks? Who knows?
a market rotation?
The defining characteristic of the Trump presidency in stock market terms has been the extreme aversion of equity investors to stocks exposed to the domestic economy. Presumably, a Trump loss would trigger a substantial rally in laggard domestic-GDP-linked names–as cheap, with improving prospects. My guess is that Trumpish back-to-the-Fifties issues wouldn’t participate fully, if at all. Maybe their joining in would signal that the rally was nearing an end.
I don’t know. Most election experts were wrong in 2016, so I’d expect Wall Street to be cautious about reshaping a portfolio around either candidate. On the other hand, the bigger the bet that Trump is a combination “useful idiot” and George Wallace redux, the greater the outperformance over the past 2 1/2 years. This would argue for an early portfolio shift for successful managers, not to eliminate entirely the bet that Trump will continue his trademark turn-lemonade-into-lemons, but to come closer to neutral to protect gains already made. However, Trump seems to be doubling down in recent days on the idea that overt white racism and pandemic denial is his best chance for reelection. So maybe it’s too soon to think the worst is over.
a different path
I’ve always found that if I’m stuck on an either-or where I have no idea how to choose, the best thing to do is to reject the idea that I need to choose either. Maybe for me looking for names in Canada, the EU or even Japan is the way to go to reduce my Trump dysfunction bet–at least until I can see the US situation more clearly.
the biggest constant
If Trump is such a loser, why has the stock market gone up during his term?
–the biggest reason is that money policy has constantly been extraordinarily loose, partly to offset the substantial negative effects on GDP of Trump’s trainwreck trade agenda. With cash yielding nothing and Treasuries close to that, money seeking liquid investments pours into stocks. At some point, interest rates will rise and stop the flow. But with the US reeling from the coronavirus, I don’t think that’s any time soon.
–about 50% of the earnings of the S&P 500 come from outside the US. Of the rest, half comes from Europe and the remainder from emerging markets and Japan. In my view, equity investors really want the second 50% and hold the first because they’re forced to.
If the US is to retain a leading position in world commerce today we need better infrastructure, better schools and the ability to harness the efforts of all Americans in support of economic growth. Washington has fallen down badly on all three fronts for a very long time. Discontent with the status quo has resulted in the election of Donald Trump as president, as I see it, on the idea that things couldn’t be worse.
Though a Barnum-like showman, Trump is, unfortunately, a popular former reality show host but not much else. He’s an incompetent businessman and a white racist who appears to relish the suffering of others. His economic “vision” is for a return to the TV sitcom world of the 1960s, to be achieved by creating a Depression-era tariff wall that will prevent better-made or cheaper products from reaching the US.
In my view, this is suicidally crazy. As far as I can tell, mine is the consensus view in the rest of the world, which is appalled by the severe turn for the worse in the US. Even now, though, my sense is that Americans in general have been surprisingly complacent the damage Trump is doing.
So far, the stock market reaction has been to shun stocks tied closely to the US economy and bid up shares of companies with global franchises or with intellectual property that could just as easily be held in, say, Canada. Over the past month or so, foreign stocks have also begun to outpace US equities for the first time in years.
What if Trump is reelected?
Let’s ignore the messy possibility the Financial Times, for one, is now beginning to discuss–that Trump will “steal” a close election, again losing the popular vote, in a contest marred by voter suppression in red states. Without that complication, the results of a Trump victory would be pretty straightforward.
First and foremost, it would be read worldwide as a national endorsement of his loony-tunes economics, as well as his racism, sadism and eagerness to use the military to violently suppress civil dissent. Not a pretty picture.
The current trend toward stocks with substantial non-US businesses, innovative technology and/or the ability to transfer operations elsewhere would likely continue. Presumably, we’d also begin to see downward pressure on the dollar for both economic and ethical reasons, as fixed income investors as well as equity holders sought to reduce their US exposure.
US brands would likely begin to lose their aspirational appeal, if they have not already. Tourism, both to the US and to US-operated attractions, would wane, even if the coronavirus is brought under control. Global businesses would feel pressure from customers and from employees to relocate. The working population of the US would begin to shrink, as a result and as 1930s Germany became a more plausible analogue for the US. Even Japan might start to look good.
US self-destructive impulses would also open the door wide to China to supplant the US as a cultural and economic world leader. At the very least, capital and portfolio investment diverted from the US would have to find a home somewhere.
more on Monday
Alarming reports about the spread of the pandemic in the south and west have stopped the stock market in its tracks over the past few days. The bad news is coming primarily from states that decided to believe the wishful thinking of the administration rather than the country’s health experts. One consequence of this has been a new round of economy-damaging moves–proposed new tariffs, for example–by Trump as he tries to distract attention from the human tragedy he has created.
Taking off my hat as a citizen and putting on my investor cap, the main stock market issue is that the spread has reached prime vacation destinations, where local governments have made no preparations for its arrival. Therefore, summer travel is dead and, unlike many overseas areas, the US consumer economy is not going to reopen soon. Are we back to the buy NASDAQ/sell R2000 (or buy NASDAQ/sell the Dow) trade that has been the key to stock market success for most of the Trump administration?
A problem: NASDAQ is expensive and the degree of its outperformance over R2000 is very, very large by historic standards. So it’s a reasonable first guess that the spread won’t get much wider. In fact, the gap had started to close before news of the virus spread came out. On the other hand, the domestic economy is being handed another setback by bungling governors and typical summer vacation travel destinations have become virus hotspots. So it’s also reasonable to conclude that the NASDAQ/R2000 spread will get wider and that the R2000 rebound will just be more ferocious when it happens sometime down the road.
Where do I come out on this?
–One of the first things any successful portfolio manager learns is that you don’t need to have an opinion about everything. Just the opposite. You need to have strong (and correct) opinions about a few non-consensus things that you shape your portfolio around. For now, I’m choosing not to change what I hold to bet on what will happen to the NASDAQ/R2000 spread.
–Regular readers will know that a while ago I made a small shift to reduce the size of my very large pro-NASDAQ overweight. That hasn’t worked out well so far, but I don’t care. I want to do more–which I look at as locking in some of the outperformance I’ve achieved so far this year. But I’m guessing that I may have a better chance to do so over the summer. In other words, from a short-term-tactical point of view (sort of like betting on whether the next pitch will be a ball or a strike) I think the economically sensitives go down as NASDAQ more or less treads water.
A related topic (for tomorrow): how will the current situation ultimately play out? I think a lot hinges on the election in November.
Typically the stock market operates in a left-foot, right-foot fashion. The stocks with the greatest potential for earnings gains moving forward, followed by a period of catch-up by the laggards. The latter is necessary for the former to make another step forward.
In the present case, the left foot is techy firms with global reach, the right is foot business cycle-sensitive, domestically oriented companies. The issue with the latter seems to me to be due to Trump continuing to urge his supporters to ignore medical protocols aimed at containing the coronavirus. The reason is arguably less important than the numbers. We know that both the EU and the US peaked at around 30,000 cases/day in late March. The EU is now around 4,000 and falling, while the US troughed at 20,000 or so and is now at 30,000+ and rising.
Until this situation changes, or until enough time passes, it looks to me like we’re stuck in neutral.
Nicholas Kristof wrote an opinion piece in the New York Times over the weekend. In it he says that in China people joke that Trump’s first name is really Build-The-Country, an early-Maoist choice to indicate the bearer’s patriotic fervor. This reinforces my impression that the rest of the world has a much clearer picture than we do at home of the damage being done to the nation by Trump’s ineptitude and his increasingly erratic behavior.