Note on Presidential Election
Updated: Oct 28, 2020
I guess I should say something about the presidential election which is coming up, as it relates to investments. But I'm not completely certain that I should. Most elections are difficult to forecast. America is closely divided. On two recent occasions, the winner of the popular vote lost in the electoral college and did not become president.
Fortunately, I don't have to make that forecast, because, with regard to investments, I don't think that it makes a difference which candidate wins. Here's a quiz question. Which of the following presidents governed well from the perspective of jobs and the stock market: Ronald Reagan, George H.W. Bush, Bill Clinton, George W. Bush, Barack Obama, or Donald Trump? The answer is… all of them! We've had a few recessions here and there of strictly temporary natures, including a big one in 2009, resulting more from a surfeit of irrational exuberance in the markets than from anything which the president did. But our policies adjusted appropriately and the market recovered and went further up. Job creation remained generally high. Invention was extraordinary. Inflation remained very low. Economically, it has been a golden age. No president pursued policies detrimental to jobs or stock investments, and I don't expect either of the current candidates to do so either.
The stock market seems to agree, which is why, here in late October, it sits very close to all-time highs, with a P/E ratio of 27 (historically high).
I will admit to you that our very long, almost continuous economic good times have been powered strongly by debt. Our national debt, measured as a percentage of GDP, has grown from 30% or so of GDP in 1980 to 135% of GDP today. That’s a lot, amounting to trillions of dollars. If you would like to amuse yourself, if only briefly, and just before you cry, check out the national debt clock online. It indicates a national debt of $217,000 per taxpayer. The numbers have become gigantic and somewhat meaningless to most people. How much can we borrow? Who knows! Measured against GDP, our national debt recently exceeded the levels of 1946, the previous record, just at the close of World War II. Judged against the metric of indebtedness, the best president from the above list, by far, was Bill Clinton. He was the only president who supervised a pay-down in government debt during his term in office.
In theory, a big excess of government debt leads to inflation. Our government has at its disposal a printing press, and can print as much money as it needs to repay its debts, an inflationary process. But I sure don’t know when that will happen. I expected it to become a problem a few decades ago. Instead, inflation declined during the entire period, even as debt shot up. Eventually, I gave up and decided to go with the flow.
Even an uptick in inflation does not automatically spell doom and gloom for stocks. Stocks are uniquely well-suited to inflation. Only when inflation translates into higher interest rates, or an expectation thereof (which will happen immediately), will the stock market take a bath. Conversely, if we fall into deflation, that will also be bad. Historically, we pull out all of the fiscal and monetary steps to prevent deflation – we haven’t experienced even one small drop of it since 1933 - a policy which will very likely continue.
The trend of growth with low inflation, the perfect environment for stock investing, has continued for my entire professional career. Perhaps I have learned the lesson too well. I encourage my clients to hold as much equity as they can, given their age and station in life, to ignore market crashes as they occur, and to avoid bonds at all costs. One day, this rosy outlook may come back to bite me.
But I am not set to reverse course yet, and I don’t think that either of our two candidates for president has the inclination, or perhaps even the power, to make debt and inflation an issue. They would get laughed out of town. You should vote for your preferred candidate, based on their many other differences.