Ian McGugan
Whoa there, folks. A lot of people are looking at U.S. president-elect Donald Trump and seeing a new Ronald Reagan.
A MarketWatch columnist lists three ways Mr. Trump could turn into the next Reagan, while the website Politico asks, "Will Trump follow in Reagan's footsteps?"
The Reagan parallel appears to be one reason for the post-election surge on Wall Street. After all, if one tough-talking Republican president can light up the economy and boost stocks by running big deficits, why can't another?
The comparison appears tempting on many levels. Both Mr. Trump and Mr. Reagan came out of the entertainment business and were regarded as intellectual flyweights when they were elected. Both were seen as radicals who would pull the nation into a right-wing abyss.
Mr. Reagan, of course, proved to be a healer rather than a provoker. Whether by good luck or good management, he oversaw a vigorous recovery and a major bull market as he became one of the most beloved presidents in U.S. history.
So can Mr. Trump manage the same feat? Nothing is impossible, but several facts scream out against the parallel. Here are three reasons why we're not likely to be witnessing Reagan redux.
Interest rates: When Mr. Reagan assumed the presidency, the effective Federal Funds rate was flying north of 17 per cent as the nation waged war on runaway inflation. The simple and obvious way to boost the economy was to ease off on those punitive rates as inflation declined.
That is exactly what happened. Within two years, rates had plunged eight percentage points, setting the stage for a strong recovery.
Mr. Trump doesn't have the same opportunity. The effective Fed funds rate is now languishing just a fraction of a percentage point above zero.
To get the same impact as the Reagan-era cuts, the Federal Reserve would have to slash rates deep into sub-zero territory – and there's no realistic way to do so. Rather than enduring negative rates of that magnitude, savers would simply rush to cash.
Monetary policy fuelled much of the economic growth under Mr. Reagan; it's mathematically impossible for it to have the same effect for Mr. Trump.
Stock valuations: On Mr. Reagan's inauguration day, U.S. stocks were trading for less than 10 times their earnings. They had endured years of disappointing performance and were generally despised. In 1979, barely a year before Mr. Reagan's election, BusinessWeek magazine had proclaimed, "The death of equities" on its cover.
It was, by contemporary standards, an odd time indeed.
Today U.S. stocks change hands for more than 20 times earnings. Wall Street has enjoyed an epic bull run since the financial crisis and just about everyone, from your auto mechanic to your therapist, follows the stock market.
Mr. Reagan did not have to do much to light a fire under an ignored and underappreciated stock market. At today's valuations, it's a much tougher job to drive already expensive stocks to even higher levels.
The economy The best time to take over an economy is when it's a low ebb.
By that standard, Mr. Reagan timed things rather well. Unemployment stood at a frightening 8.2 per cent on his inauguration day while inflation was a towering 11.8 per cent.
Compare that dire outlook to the much brighter situation facing Mr. Trump today. Unemployment has fallen to 4.9 per cent while inflation ticks in at a barely noticeable 1.5 per cent.
Yes, today's economy faces many stresses, but it's in nowhere near the same desperate state as it was when Mr. Reagan took office. And that's going to make it difficult for Mr. Trump to achieve anywhere near the same dramatic gains as his illustrious predecessor.
Ian McGugan