Not since the 1892 US presidential election have two presidents faced off in a general election. At the time, one candidate was in office, while the other was seeking a rematch after being voted out in the previous election. Sound familiar?
We know that anything can happen in a typical presidential election year, and there are indications that 2024 could be particularly unusual. However, the notable first terms of the leading candidates – Presidents Joe Biden and Donald Trump – give observers a tangible idea of how they might govern and manage the economy and how financial markets might take their administrations into a second term. .
But first, a pandemic-sized warning: the impacts of the first three years of the Trump administration can be assessed through an objective lens before we encounter significant distortions related to COVID-19. President Biden's tenure is subject to a similar but less clear definition, as economic reopening progressed during the first half of his presidency.
Presidential priorities
The major policy triumph under unified GOP control early in the Trump administration was passage of the Tax Cuts and Jobs Act in late 2017. Taxes for individuals and corporations were cut by about $1.4 trillion over a decade , catalyzing a reflationary trend that represents the first strong inflationary impulse of the post-global financial crisis era.
Revamping American manufacturing by raising trade barriers was also a central part of the Trump administration's economic policy. The executive branch imposed import tariffs on various goods and commodities starting in early 2018, with a large portion of the burden borne by US-China trade. About $350 billion of U.S. imports from China were hit with new or increased tariffs in a trade war that invited about $100 billion in retaliatory tariffs against US exports. These tariffs raised the cost of trade without significantly changing its balance or shrinking the US trade deficit with China.
The Biden administration's economic priorities came together in three pieces of legislation in 2021 and 2022 during a period of unified Democratic Party control:
- The Infrastructure Investment and Jobs Act created $550 billion in new spending and $650 billion in reauthorizations for infrastructure priorities.
- The CHIPS and Science Act — focused on technology supply chain security — appropriated $280 billion to boost domestic semiconductor production and fund science and technology research.
- The Inflation Reduction Act combined $700 billion in revenue with about $900 billion in spending. Most of the spending was dedicated to clean energy and climate change priorities.
Economic impact
US GDP averaged 2.8% at a seasonally adjusted annual rate from 2017 to 2019, an improvement over the post-GFC trend. However, there was no apparent benefit to US manufacturing from Trump's tariffs, with data showing that growth gave way to a manufacturing recession during the period of the tariffs.
The lack of evidence of a positive impact on US manufacturing or trade is significant. Tariffs raise the cost of goods, acting as a tax on American consumers and weighing on demand. At the same time, domestic production requires capital investment and time to compete with overseas manufacturers. The Biden administration has retained most of Trump's tariffs, but a broader, broad-based tariff regime appears to be the heart of Trump's second-term economic platform.
During Biden's tenure, GDP averaged between 1.9% and 3.0% through 2023, depending on when we start in 2021 or 2022 to mitigate the impacts of the pandemic. Biden effectively translated his platform into law, but the market is beginning to signal that the days of unchecked government spending without consequence may be numbered. And while just under $1 trillion in new spending from Biden's three signature bills pales in comparison to $5 trillion in pandemic emergency spending, the willingness to continue with large deficits in 2022 and 2023 raises the question of whether budget discipline would be a priority in a second Biden administration.
Impact on the market
Financial markets include global developments and massive amounts of information, only some reflective of presidential decisions. Combined with the impacts of the pandemic era, we are aware that we derive a lot of value from market analysis.
The past seven years of US stock performance align better with the Federal Reserve's monetary policy than the successes or failures of the White House.
The rise of “Trump reflation” in 2017 transformed a nascent effort by the Fed to normalize rates after spending seven years near zero into a full cycle of rate hikes. A significant sell-off in 2018 was largely erased late in the year when the Fed capitulated and remained on hold until 2019.
Markets were a roller coaster during the pandemic era, but ultimately quite positive until the inflationary spike of 2021 and 2022 triggered the sharpest rate hike cycle in four decades, triggering a sell-off. 2023, like the end of 2018 and 2019, saw an easing rally fueled by the Fed's pause.
Finding common ground
The world has changed significantly in the eight years since the 2016 election. Four critical observations strike us:
Fiscal policy is murky. Both candidates have a record of prioritizing their agendas at the expense of a growing budget deficit. Even if we exclude the period of the pandemic, each has managed to increase the deficits throughout his term. The growing debt of the US government will become increasingly difficult to discharge over time.
We do not need to make a value judgment about this approach to fiscal governance – the markets have begun to do just that. Bond investors were underwhelmed last summer as Treasury issuance beat expectations, pushing the average interest rate servicing the federal debt to the highest level since 2010.
The peak of globalization has given way to deglobalization. We can think of the period leading up to Trump's tariffs as the peak of globalization. The Biden administration's focus on developing domestic industrial capacity for technology equipment and clean energy is also evidence that deglobalization is well underway. In this sense, both administrations moved to protect US interests, albeit in different ways, as the bipolar US-China power dynamic was reshaping the world.
Bipartisanship has sunk to new lows. We could have made the same point in 2016, but the political dysfunction seems worse now. There is a limited ability to avoid budget constraints, let alone find consensus and create sensible policy.
Both candidates would be limping on the first day of their second term. Whether this will manifest in a diminished ability to extract concessions or an increased willingness to take risks without personal consequences probably depends on the candidate's governing style.
They also face a significant opportunity to share power. Polls and forecasts show swings for the presidency and control of the House of Representatives. In contrast, control of the Senate appears to be leaning toward Republicans, given that Democrats hold 23 of the 34 seats. for election.
Deglobalization and the lack of incentives to reduce federal deficits represent challenges that will stay with us no matter who wins in November. And with all the focus on character and skills, we're confident the winner will have a team determined to see their priorities through.
One final point of bipartisan praise: Both Trump and Biden presided over a return to the lowest unemployment rates since the late 1960s. The high likelihood of continuation—one way or the other—could mean that the trend in benefits that pile up on Main Street takes a hit for another four years.
Ronald J. Sanchez is Chief Investment Officer at Fiduciary Trust Company International