Should Stock And Bond Investors Continue Their ‘Hop Of Hope?’

Stock investors have made a “hop of hope” since the election of Donald J. Trump. Specifically, the new administration’s dedication to the repatriation of foreign profits, the lowering of corporate tax rates and the reduction of onerous regulations may create impressive wage growth as well as momentous economic growth.

Keep in mind, year-over-year wage growth and annual GDP growth during the nearly eight years of recovery fell way short of pre-Great Recession growth rates. Wages have grown at a sub-par 2.25%; GDP has served up a disappointing 2% over the same period. And this all came with nearly $10 trillion in federal spending as well as close to $4 trillion of Federal Reserve spending. That’s an amazing amount of stimulus with shockingly limited improvement. (See chart below.)

Based on what the new administration will be able to achieve through government stimulus, is the “hop of hope” by stock investors warranted? Can the Trump/Congress implement targeted fiscal measures in the mammoth size necessary to achieve genuine growth? With an immediate impact here in 2017?

It is difficult to believe that it will proceed smoothly.

Let’s take step back to the Great Recession (12/07-5/09). The United States Federal Reserve dropped its overnight rate to 0%, and left it there for seven years (12/08-12/15). Additionally, they electronically printed dollars to buy bonds, pushing borrowing costs down to their lowest levels on record. This has been great for corporations to borrow on the ultra-cheap as well as to plow the money back into repurchasing stock shares.  It was great for stock investors who benefited from the significant decrease in the supply of shares as well as a relatively healthy demand for them. And it was wonderful for homeowners who wished to refinance their properties, not to mention any household/business/group that wanted to leverage to acquire more real estate.