Saturday, November 19, 2016

Equity Market Beginning To Resemble Bull Market Of The 1950's And 1980's

In the early days following the presidential election, the equity market seems to be anticipating better economic growth in the years ahead. Knowing the economy is not the market though, investors believe a better economy will translate into stronger corporate profits as well. When the new administration takes office in 2017, Trump's campaign comments indicate the economy is in need of more government spending, specifically on infrastructure and the military. Additionally, a Trump administration has promised tax reform, and specifically tax cuts.

History does not necessarily repeat itself perfectly; however, it does tend to rhyme. The below chart overlays the S&P 500 Index from September, 2013 compared to the bull markets of the 1950's and 1980's. Trump's anticipated policies do have similarities to policies pursued in the 1950's and 1980's and those two decades were periods of a strong bull market.

The decade of the 1950's followed World War II and pent up demand saw the Gross National Product in the U.S. more than double from 1945 to 1960. Government spending in the 1950's was targeted at construction of the interstate highway system, building of schools and an increase in military spending. A Trump administration is indicating a stimulus program would focus on infrastructure and the military.

The decade of the 1980's was know as the Reagan Revolution. A focus of President Reagan's policies was reducing the tax burden on Americans, lowering government regulation and shrinking government itself. During Reagan's years in office, he cut the top tax rate from 70% to 28%. President Elect Donald Trump also projects to implement similar policies as Reagan, i.e., reduce regulation, shrink the government and lower taxes.

The 1950's and 1980's were good decades for equity investors. President Elect Donald Trump is projecting he will pursue policies that look similar to those implemented by presidential administrations of the 50's and 80's. If Trump's policies have a similar impact as those in the 50's and 80's, the coming years could be rewarding for equity investors.

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