While most of Wall Street may have given up hope for a trade deal with China before the 2020 election, I still have faith. I believe we can and will reach a solution. This would be, after all, the best path forward for the economy and President Trump’s reelection hopes.
Historically speaking, this is a critical year for the President’s reelection hopes. Historically, the economy’s performance in the third year of a President’s term is crucial to the chief executive’s prospects for a second stay in the White House. So, it’s the prime season to get markets and the overall economy in good shape. After all, who wants to reelect a leader who puts us in economic shambles?
For context, the Dow Jones Industrial Average (Dow) finished up in the third year of presidential terms in all but one instance in the past eight decades. (The one-off dip happened at the outset of World War II in 1939, when the Dow dropped 0.1 percent.)
As you can see, strong markets make for strong reelection hopes. The flip side is that a slowing economy makes presidents especially nervous when it comes time to cast ballots.
So, where exactly does President Trump stand regarding this third-year itch?
Yes, the trade war with China rages on, much to the chagrin of our nation and the rest of the globe. But, having “common enemies” is a mighty tool for uniting people; we all see China as the enemy. So, Trump could arguably be setting himself up to be America’s hero.
A recent article from Strategas, an institutional broker-dealer focused on investment and sector strategy, macro-economics and policy research, presents the situation differently.
According to their report, “Additionally, on September 1st the US is set to impose tariffs on 70% of its consumer good imports from China. The President sees tariffs as hurting China more than the US and is going all in on trade escalation to force China to the table…. But the bond market is sending a signal that we are nearing a policy error.”
I disagree. The “setting of the stage” that I outlined above is a powerful and realistic one. Of course, it’s not as powerful as having a robust economy. So, my guess is that Trump will pitch both angles.
Plus, “nearing a policy error” means the trade war has been pushed too far and/or the Fed needs to reduce rates further. To me, neither of these arguments hold water. As Strategas also says in the report, “Voters rate Trump’s handling of the economy very favorably, real disposable income growth is greater than 2%, and unemployment is at record lows. These are key indicators that historically suggest a reelection win.”
So, which one is it? Are we on the path to policy error or one to continued prosperity?
My preference (and probably every other American’s, too) would be for there to be a trade deal and a healthy economy before the election happens.
According to Strategas, “[W]e’re fifteen months away from the general election and the economic drag from the trade war is materializing.”
While consumption has remained strong, the “economic drag” that Strategas referenced appears, according to the source, in the form of leading indicators like capital expenditures (capex) and manufacturing work hours.
“We believe this is important because capex boosts productivity which allows companies to boost wages without endangering inflation. Less capex will eventually slow the US consumer,” says Strategas.
One thing to remember is that we don’t need a trade deal for the economy to be good; we need one for the economy to be great. And elections have been won with “good” economies.
If the economy continues to hold its own, and the trade war either comes to resolution or simmers to below a boil, it’s likely that investors will refocus. They’ll home in on reasonable earnings growth. Under this outlook, investors could find a stock market with strong company fundamentals and attractive valuations.
And, back to presidential history, the average return for the S&P 500 during the third year of terms has been over 20 percent. Of course, history is only a guide, but it should at least provide a tailwind to US equities in 2019.