The uber-bullish meme right now is that Trump is going to kick start the U.S. economy like Ronald Reagan did in the 1980s. Implication: A major financial market boom is about to commence.
It’s a misguided analogy, says Hedgeye Demography Sector head Neil Howe in the interview above. Below are his top-3 reasons why the current economic environment is not like the 1980s:
- Demographics Favored Reagan, not Trump -- In early 1980s, a large generation of youth was entering the labor force, giving an extra 1.4% annual kicker to GDP growth. Today that annual growth kicker is only 0.2%. Also back then, new flood of working women added an extra push. Today, women’s LFP rate is actually falling.
- Debt, Savings, Earnings Favored Reagan, not Trump – In early 1980s, the federal debt and total nonfinancial debt as % of GDP were low; today they are high. The net national savings rate was double what it is in 2016; the current account surplus was positive; and S&P profit margins were historically thin (not fat—as they are today).
- Valuations Hugely Favored Reagan, not Trump – Most equity valuation measures were roughly double-sigma below the long-term average when Reagan was elected. Today they are double-sigma higher: Shiller’s CAPE, Tobin’s Q, market cap/GDP, sales/GDP, household net worth/GDP. Valuations flashed green in 1980, red today.
Here’s another thing to keep in mind, Howe says. Shortly after Reagan was elected, U.S. equities crashed. From November 1980 to August 1982, the S&P 500 fell -27%.
Click here to watch the full video “Here Comes Trump: Our Top Five Investing Themes.”
