Trump Tariff--Obama Bull Market Terminator

Trump Tariff--Obama Bull Market Terminator

Market Parallel

In November last year, IBD published an interesting article : The Case for Trump Bull Market. The article compared current market with Reagan's Bull Market after Stagflation 1970s. To accurately interpret which stage is current bull market--starting on March 9, 2009 right after Obama went to White House,  we need to first know the macro-fundamentals behind Reagan's Bull Market.

Reaganomics

In January 1981, Ronald Reagan became US president after beating incumbent president Jimmy Carter by landslide through the following six-plank creeds of Reaganomics:

• Reduce personal income tax rates;
• Eliminate inflation and restore a strong dollar;
• Downsize the government and balance the budget;
• Deregulate key industries like energy, financial services, and transportation;
• Expand free trade and embrace globalization;
• Win the Cold War by rebuilding the military.

Except for failing to balance the budget, Reagan almost accomplished every agenda in his 8 year of tenure. Notably he succeeded to warm up Gorbachev to sign up Intermediate Nuclear Forces Treaty, paving the way to democratize the ex-Soviet Union and ending the Cold War.

During the past 100 years of market history, every major bull market happened in the time of peace and low inflation as Jeffrey Hirsch evidences in his masterpiece of Super Boom. By ending the Cold War and eliminating high inflation, Reagan created a benign geopolitical environment for the bull market to continue without perma bears in next 10 years. However the real catalysts to drive the Reagan bull market were free trade and tax cut, which energized USA economy.  

Laffer Curve

If tax cut happens within a country, free trade is another tax cut between countries. In 1974 Arthur Laffer created the concept of Laffer Curve which is coined by Jude Wanniski. It says for each tax revenue, there are two tax rates to achieve it; In many cases, the lower the tax rate, the high the revenue, which is counterintuitive and bothers so many policy-makers before JFK who was the pioneering president to implement tax  cut to grow economy. 

Free trade and tax cut are two key pillars of Reaganomics. Which is more crucial to the growth of economy: free trade or tax cut? 

During Clinton era, tax were raised but free trade kept, economy still grew solidly. Therefore we can at least say free trade seems to be more crucial than tax cut. So how free trade or trade tariff impacted economy and stock market? 

Smoot-Hawley Tariff

According to Jude Wanniski research, Smoot–Hawley Tariff  was the killer of 1920s bull market and major catalyst of Great Depression. Although Smoot-Hawley Tariff wasn't enacted into law until June 1930, financial markets routinely discount the impact of future events well before an action becomes effective. Economist Alan Reynolds observed the every time the tariff bill pass had a setback, the market rallied; whenever the prospects improved it fell.

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On June 13,1930,the Senate voted , as the Times reported the following day:

Senate Passes Tariff Bill by 44 to 42; Europe Takes First Move in Reprisal;Germany and Belgium to Stop Buying Here. On this news, stock market dropped 14 points on the DJIA to 230.

On Monday, the stock market reacted to the loss of the last hope of tariff bill. The June 17 Times front page reported:

Break in Stock and Commodity Prices;Selling Swamps Exchanges; leading Issues Tumble as Wall Street Assails the New Tariff...

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Granted, lot of other reasons contributed to 1929 market crashed and afterward Great Depression,  but monetary forces had already made the economic and financial environment very vulnerable to any shock. The Smoot-Hawley Tariff may have been the last straw, a trigger that pushed the stock market and the economy into a major downturn---as Bruce Bartlett said.

Trump Economic Plan

Trump's economic plan are:

• Tax cut;
• Cut Government Spending; 
• Deregulate financial industry, etc.
• Repeal Obamacare;
• Adopt Trade Tariff;
• Create Jobs;
• Reduce debt and Seek Strong Dollar;
• Send Illegal Immigrants Back;
• Enhance Military capability .

Comparing Reaganomics with Trumpnomics, we can find there are lot similarities. No wonder some people think Trump will be next Reagan.

But a major difference exists: Reagan promoted free trade and initiated NAFTA which was signed into force in 1994 during Clinton Administration. Trump wants to  enact high tariff and change global free trade.

Marketwise, Reagan's bull market started after sluggish stock markets in previous decade; while Trump market begins after 8 years of Obama bull markets. Historically margin positive impact or even slight negative impact may upend bull market.In other words, any material negative catalyst may drive market players to take profit after long bull markets.

As the above evidenced, Trump Trade Tariff may highly likely hammer the US economy and send global stock market into a bear market or correction. After Reagan  8 years of bull markets, markets up 30% in 4 years during Bush Sr. Administration. Will Trump market repeat Bush Sr. market? History often repeats.

So far market seems to confuse with the fact that  Trump will adopt full-scale trade tariff . Nasdaq market showed weakness so far with high amount of institutional selling pressures, which under normal situation signifies a correction is coming.

As an old saying puts: if Santa Clause cannot call, bear will come to Broad and Wall. This time the market moved weirdly during the first 3 days of Santa Clause. maybe the markets know some painful uncertainties ahead: trade war, interest rate hiking, Brexit, elections in French and Germany, and unpredictable Trump's economic policy.

If  market behaviors badly on Tuesday and Wednesday, watch out: we don't have Santa Clause Rally this time---market often  performs worst in the first year of presidential term, especially for a new president.  

Happy New Year to All

Gunning Ju  NYC

A Market Analyst 

Reference:

1. The new American Economy( 2009)--Bruce Bartlett;

2. Clintonnomics (2009)---Jack Godwin;

3. Super Boom(2011)--Jeffrey Hirsch

4. The Reagan Years( 2000)---Darv Johnson;

5. JFK and Reagan Revolution(2016)---Lawrence Kudlow,etc;

6. The End of Prosperity(2008)--- Arthur Laffer, etc.;
7.It is the Time to Get Tough(2016)--Donald Trump;

7. The Way the World Works(1978)---Jude Wanniski.