We have been hearing plenty of comparisons recently between “Reaganomics” and “Trumponomics”. Even their populist slogans, of “Morning in America” and “Make America Great Again” ring a similar tone. Shaking things up in Washington DC was as popular of a theme in 1980 as it is today. Rolling back job-killing government regulation, reducing taxes, and a focus on national defense are all common themes that the stock market has embraced.
But, this is not 1980. Reagan enjoyed pertinent structural advantages that, while not fully appreciated at the time, positioned stocks and bonds for a nearly two decade rally. Stocks were relatively cheap then, providing fuel for higher valuations. Ultimately, Price to Earnings grew from around 10x earnings to 27x earnings in 1999. In addition, bond yields were incredibly high, but proved to be the beginning of a 35 year bull market, as interest rates declined. Lastly, federal debt was a fraction of what it is today, providing ample room for deficit spending on things like defense spending, which contributed to growth.
In contrast to Reagan’s beginning point, today’s stocks prices are in year eight of a bull market and fully valued at 18x next year’s estimated earnings. Bond yields have recently hit an all-time low and appear to be moving higher, hurting bond prices. And, federal debt is the highest in U.S. history and forecasted to expand, limiting infrastructure investment.
So, while we are constructive on the economy and job growth, we continue to believe stock returns will be challenged in an environment that has discounted so much optimism.