When Donald Trump was elected four years ago, one of the most memorable quotes of the day came from Nobel Prize-winning economist Paul Krugman. Writing in The New York Times in the immediate aftermath, at a time when futures trading indicated that markets were set to plunge, Krugman confidently stated: “If the question is when markets will recover, a first-pass answer is never”. Since that day, the US stockmarket – as measured by the S&P 500 index – has gained about 60%. Indeed, if you’d bought the index on election day, you’d have spent virtually no time at all in the red. So much for “never”.
You can take quite a few useful lessons from this. One – don’t listen to hopelessly partisan people, even when they claim to be experts. Two – it often pays to bet against the conventional wisdom and the stronger the convictions behind that wisdom, the bigger the pay-off. It’s easy to forget now, but Krugman’s view was not at all unusual prior to Trump’s election. Virtually everyone thought that Hillary Clinton would win and most people found the idea of a Trump victory inconceivable. The idea that markets would rally that very day, let alone spend most of the next four years going up (barring a global pandemic), would have seemed outlandish, even to those without strong views on the election outcome. As it turns out, whatever else Trump did or did not do (we look at his record so far this week), the most catastrophic predictions for his time in office have not come to pass. Yes, it was a low bar to beat – but that’s the point.
But I think the most important lesson as we head into next week is this: by the time our next issue comes out, the voting will be over. Whether we’ll know the result by that point is another matter. But what really matters for markets in the longer term (and we’re all longer-term investors here, or at least that’s what we should be aiming for) is not who ends up in the White House, or even how long it takes for them to get there. Is the S&P 500 higher today because of anything Trump did? I doubt it. If Clinton had won, I imagine the S&P would have seen similar gains and rather than Trump’s tax cuts, today we’d be rationalising them with talk about Clinton’s healthcare stimulus package or whatever.
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In reality, markets pushed higher because inflation remained tame and the secular decline in long-term interest rates just carried on regardless. The real surprise for markets will come when this ends. Whoever is in power – be it Joe Biden or Trump – is likely to be much more open to spending piles of money to drive the recovery from Covid-19, particularly as it looks like the virus isn’t done scaring our politicians yet.
We’ll have a lot more on the implications of this shift from a disinflationary environment to a more inflationary one in next week’s issue, which happens to mark the 20th anniversary of MoneyWeek’s launch. We’ll be looking far beyond the presidential election to focus on the biggest investment trends for the next 20 years. We’d also like to hear from you. If you haven’t yet answered our five questions on big technological and investment events that might happen between now and 2040, then go and read them on page 18 and email us your thoughts. Get your answers in by Monday morning though – we’ll be publishing the best ones in the next issue.
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