David Skarica on Trump Election and Financial Markets (11/23/2016)
Now that he is elected we see the psychological optimism linked to cutting taxes, deregulation, and infrastructure spending being reflected in the stock market. David Skarica thinks the stock market is overvalued, and this upward trend won’t last long. He is preparing for a crash between the summer and fall- which is the common historical trend, as is a crash under a Republican majority.
Many are comparing Trump to Reagan, and David points out some key similarities and differences. In 1980 as well as present day- we have high unemployment, stagnant wages, and are coming out of a 6 or 7 year bull market. There are some glaring differences though. When Reagan took office, the debt to GDP of the US was around 30%.. the interest rates were higher, and people had very little personal debt. When they increased spending and cut taxes, they could run the huge deficits because it was at a low level, while interest rates were coming from a secular top.
Now the debt to GDP is over 100%. Interest rates likely bottomed this past summer, and should be headed higher for the next decade. The tax cuts probably won’t work like they did in the 80’s, because people are too indebted with mortgages, student, and car loans. The tax cuts savings will go to pay off debt, not back into the economy. Stock market capitalization to GDP is 125% right now. It has only been higher during the 2000 bubble in stocks. So we are very overvalued. Even the best of policies probably can’t change that.
The Fed is expected to raise rates in December and a few times next year, while Japan and Europe are still printing money- and every other central bank is either standing pat, or loosening. This means the dollar might go higher in the short to intermediate term, but If the US policy divergence in interest rates continues, it could burst the stock market bubble. Democrats tend to tax and spend, while Republicans borrow and spend- so we can expect huge deficits.
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