Where will the stock market go in the Trump administration? During the Obama presidency, it has advanced nicely, even amid so-so growth. Andrew Houghton and Nicholas Atkeson of Delta Investment Management in San Francisco show us why a bullish view for the market has further to rise.
The presidential election cycle occurs every four years, no matter what is going on with the economic cycle and stock market. Barack Obama took office on Jan. 20, 2009. The country had been in recession 14 months, the housing market bubble had popped over a year earlier and the SP 500 had lost roughly 46% of its value. Since 1900, the average recession had lasted 15 months.
The magnitude of the market decline from the October 2007 high to inauguration day 2009 had only been experienced twice before since WW II – 1973-74 and 2000-02. On Jan. 20, 2009, there was a high probability the stock market would trade higher over the next four and eight years, given the depth of the decline and the duration of the recession, no matter who was elected president.
One of the key tenets to successful investing is to buy low. This is followed by sell high. Obama’s inauguration missed the ultimate market low by about six weeks. Today, Obama relinquishes the presidency to Donald Trump. The SP 500 is up 167% during Obama’s two terms. History is likely to judge Obama’s presidency as favorable for the stock market.
The schedule is the schedule and it must be kept. Trump does not have the freedom to pick which day he is inaugurated. With the major stock indexes near all-time highs, Trump may have been handed exactly the opposite stock market fate that Obama experienced. The current expansion has endured for 90 months. The average expansion since 1900 is just 47 months.
On closer inspection, the timing of inauguration day 2017 may actually be more of a mid-cycle entry point rather than a high. Trump is becoming president after the slowest expansion on record since WW II. The tepid pace of growth and meager cumulative advance of the economy may allow for several more years of growth. Since the prior economic peak in the fourth quarter of 2007, the total cumulative growth of the economy is about 11%. The average amount of cumulative growth in prior expansions was about 23%.
The Federal Reserve Bank estimates the long-term annualized growth rate of the U.S. economy (real GDP growth) during all periods (expansions and recessions) is roughly 3%. During the current expansion starting in the second quarter of 2009, real GDP growth has been 2.1%. Not only is the current expansion the weakest expansion on record so far, the 2.1% expansion growth rate is well below the long-term average growth rate.
So no matter who became the next president on Friday, there is a reasonable probability that the economy has room to expand further before becoming unsustainably inflated and breaking down into the next recession. Like Obama, Trump may have gotten lucky with his timing. At the end of Trump’s presidency, we may look back over the Obama-Trump years and say they were the good old days of slow and steady growth.