In 2012, after Obama won his second term as President, the stock market tanked. A very conservative member of our Church parish in his 80s who had supported Romney expressed concern to our priest that he might need to cut back his planned pledge to the church because a second Obama Administration would result in a huge drop in the stock market.
As this chart shows, these fears were misplaced. The stock market did quite well in Obama’s second term. Any one who adjusted their portfolio based on political judgments in 2012 would have done very poorly.
This was not true just of the Obama presidency. By and large stock market gains have had little correlation with who was President. And an investment strategy based on political ideology would generally perform very poorly indeed.
Despite this history, it is worth considering whether the economic policies of Trump should lead to a different conclusion. I know of some who took their entire portfolio out of the stock market before January 20th. In April, after the announcement of the massive reciprocal tariffs, this looked like a very wise decision. Today—with the S&P500 up over 6% year-to-date—this decision does not look wise at all.
There are certainly reasons to fear how Trump’s policies will impact the economy. The Trump tariffs announced in April would have resulted in an average US tariff rate higher than the the infamous Hoover Administration era Smoot-Hawley Tariffs that caused our economy to go into a tailspin. And the folks who know the US economy better than anyone--the folks that buy and sell stocks--gave their view of the tariffs: the S&P index went down more than 4%.
While this tariffs were put on hold, there are news reports that negotiations with some of our closest trading partners—such as Canada and the EU—are going badly and Trump has once again threatened punitive tariffs. Trump’s announcement this week that he would impose 25% tariffs on Japan and Korea was not well received by the stock market. He is now talking about a 40% tariff on pharmaceuticals!
Another concern is that the Trump mass deportation will result in severe labor shortages in key sectors of our supply chain—most notably agriculture and food processing—that will cause both inflation and a loss in GDP.
I share these concerns—and expect another sharp drop in global markets should Trump once again impose large tariffs on our trading partners—but nonetheless don’t plan to make any changes to our family portfolio as a result.
Am I crazy? I don’t think so.
As an initial matter, I am humble about my ability to predict the future. One of my favorite financial writers, Barry Ritholz, bases much of his financial advice on a simple premise: nobody knows what will happen in the future and most of us are really bad in our predictions:
A regular theme around these parts is “Nobody Knows Anything.”
Specifically, nobody knows what will happen in the future. This is true about equity and bond markets, specific company stocks, and economic data series. We do not know which geopolitical hot spot will erupt in turmoil; we have no idea where or when the next natural disaster will hit. We remain clueless as to what sports teams will win it all or who will be the MVP for any league. The best films, books, and music releases are unknown in advance.
The tariff talk may be bluster and I could be wrong about the impact of the Trump tariffs. We have had Presidents in the past with awful economic polices, but the markets still continued to grow. I therefore have an investment strategy designed for the long term that is not dependent on my ability to predict the future. As Yogi Berra said, predictions are hard, especially about the future.
But there are other reasons as well. First, I have a diversified portfolio designed to weather even sharp losses in the market. The market tanked in both the financial crisis of 2008 and the COVID-19 pandemic in 2020, but those of us who stayed the course did better than those who panicked. I can rely on my cash holding during even a long drop in the financial markets.
Second, while Presidential policies can certainly impact the economy and financial markets, the President’s real impact on the economy is more muted than we think. Other factors—the creativity of companies in response to problems, Federal Reserve actions, profitability, and many others—are often far more important. A good example is the recent inflationary period: Biden’s fiscal policies are often blamed for the inflation—and they may be partially responsible—but the fact that inflation was a problem in every industrialized country with wildly different policies suggests that other factors played a much larger role.
Third, while the checks and balances in our Constitution don’t seem to be stopping Trump, the financial markets themselves have so far been a significant check on Trump’s policies. As I noted in a previous post, Trump pulled back from his massive tariff increase after the bond markets went south. James Carville famously said "I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a 400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody."
We have seen this before. When U.K. Prime Minister Truss announced an irresponsible fiscal policy, the bond markets caved forcing her to change course. And just last week, the bond markets plummeted again in the UK when the Labour government abandoned a planned cut in spending.
The long and the short of all of this is that Trump finally ran into an institution he cannot bully: the bond market. I think this will happen again if he brings back large tariffs.
I fear that Trump will damage the economy. I fear that my 401(k) portfolio will nosedive as a result. The lesson of history, however, is that even really stupid economic decisions—remember the 2008 financial crisis!—will have a short term impact.
Whether you think that Trump is an economic genius or fool—and you know I am in the latter category—the best strategy is to stay the course.
I agree with your assessment. I have not made any substantive investment changes based on political winds (although I have long held a diversified international portfolio). But a key question: while bond markets can certainly sway immediate or short term decisions, e.g., tariffs, are they as good correcting for longer term decisions whose more immediate impact may not be felt, but could have major lasting implications. Obviously, the skyrocketing debt is one issue. But even beyond "policy" decisions, the erosion of American institutions, and the rise of commercial socialism (nationalization of US Steel?), does not bode well. One of the books that has had a significant impact on me is Why Nations Fail: The Origins of Power, Prosperity, and Poverty by Daron Acemoglu and James A. Robinson, which demonstrates the role of inclusive and extractive institutions in the fate of a nation, and the current trajectory with respect to both does not bode well.
However most Americans probably now have 90% of their net worth in dollar assets and the dollar has already fallen 9% since he got elected. The dollar has fallen under every modern Republican president, including 40% under Bush 2. In Bush’s term the U.S. market went nowhere, while international stocks and especially emerging markets did well — and they have outperformed the U.S. year to date. If the Dems take the house in the midterms, that is the worst situation for the dollar in recent history. So diversifying out of the dollar (and not into crypto, which looks like a derivative of the NASDAQ) may be a good idea.