There is justifiable celebration in Republican/Conservative circles. The national economy, which was moribund under the weight of Obama-style democratic socialism, has been unleashed. The expectation of deregulation and tax cuts and higher corporate earnings has encouraged job creation and pushed the stock market higher. GDP growth is much higher than anyone thought possible at this stage of the game. President Trump's encouragement and/or pressure for the corporate community to create American jobs has likely had an effect also.
It is difficult to see that the same things would have happened had Hillary been elected.
But I think we need to be careful. To the extent that we claim that the market and the economy are the ultimate indicator of Trump's worthiness, that leaves us little wiggle room in the event that things deteriorate.
And there is ample reason to believe that we will see a bear market or major correction within the next year or two. This would have likely come sooner, but Trump has given us a temporary reprieve. Consider the circumstances:
- The market is overvalued;
- Interest rates are increasing;
- The Federal Reserve's quantitative easing is being unwound. The economy and the market had been artificially inflated because of the Fed's policy for years;
- There is an ever-increasing amount of federal debt that will consume greater amounts of the federal budget. Some feel this will spur a crisis at some point;
- Federal spending as a proportion of GDP is much higher than it had ever been during better economic times;
- There is reason to believe we will be seeing increasing defaults on corporate junk debt;
- Lots of bad loans remain outstanding-- especially student loans and subprime automobile loans; and,
- Much time has passed since the last bear market and the beginning of the last recession.
And of course, bear markets often correlate with or otherwise presage economic downturns or recessions. It is difficult to know when the major impact of the next downturn will be, and how it will affect the political cycle. If Trump and the Republicans still hold power, they will be held responsible by swing voters if the downturn happens at the wrong time.
Interestingly, the Federal Reserve timed the impact of the end of quantitative easing, and its decisions to increase interest rates, to occur after the 2016 election. I believe that was by design.
I have also seen celebratory statements that the GOP tax cut bill essentially kills Obamacare because the individual mandate has ended. Nothing could be further from the truth. The Medicaid expansion, which is enormously expensive, continues. The subsidies for certain folks who access insurance on the Obamacare exchanges continue. Both contribute to a much higher national debt. And of course, Republicans in the Senate seem eager to bail out the insurance exchanges with taxpayer money. Obamacare isn't going anywhere unless the Republicans grow a spine. But they likely won't.
I am glad the economy and the market have surged, at least temporarily. More folks are finding suitable work. And it has certainly helped the retirement accounts of many American citizens.
But it might be wise to be prepared for the moment things deteriorate. It is difficult to know what the immediate precipitant will be, and when it will happen. But forces much larger than the GOP tax bill will take precedence, sooner or later.
It might be politically wise for the Republicans in Congress to begin delivering for their base. It may be their only hope to ride out an unfriendly future economic cycle.