With Rick Newman, Senior Columnist at Yahoo! Finance
The day after the election, the Dow Jones Industrial Average rose over 500 points. Pundits say this was because the election results were almost exactly what Wall Street expected, without any real surprises. The Democrats took the House, the Republicans retained the Senate, and markets were up because the uncertainty was lifted.
Wall Street Likes The Prospect Of No Further Tax Cuts
Wall Street was also relieved that the outcome meant there wouldn’t be further tax cuts. While this sounds counterintuitive, additional tax cuts would have forced the U.S. government to borrow more to cover the tax shortfall, which would have pushed up interest rates.
With Democrats controlling the House, there will be no more tax cuts. Consequently, the Federal Reserve may hold off a little on raising interest rates, and that is good news for Wall Street.
$21 Trillion Debt Load Threatens Financial Stability
So far, the markets haven’t given much thought to the $21 trillion in U.S. debt or our $1 trillion annual budget deficit. But a recessionary scenario could bring this issue to the fore and rattle markets. That’s because our high debt level severely reduces the ability to borrow our way out of a recession.
A day before the midterm elections, Rick wrote a piece titled “Trump’s grade on the economy rises just before midterms.” After hovering at a B for eight months, Yahoo Finance’s Trumponomics Report Card had drifted up to a B+ grade because average hourly earnings went up a notch. Trump now has the second highest grade compared to his seven predecessor presidents, and it’s a very good grade given the dynamics of today’s economy, says Rick.
The Economy’s Role In 2018 Midterm Elections
Steve and Rick also discuss the economy’s role in the outcome of the 2018 midterm elections. Rick believes the Republicans outperformed in the elections relative to the average performance of the party in power during midterm elections. They lost fewer seats in the House than is typical for a president whose popularity rating is below 50%, as Trump’s is. And they gained seats in the Senate when what’s normal is a loss of a couple of Senate seats for a president with low approval ratings.
So, while this might not feel like a victory for Republicans, they actually did better than expected compared to historical norms. The reason for this is the strong economy.
Usually, the economy is #1 on the list of voter concerns, but it ranked #3 this time around. Voters were more concerned about healthcare and immigration. Had the economy been weaker, Republicans would have fared a lot worse in the midterms.
Looking Ahead To 2020
Looking ahead, the economy could stay strong, or it could falter. Anything is possible, and the economy will likely be a decisive factor in the 2020 presidential election, notes Steve.
If the economy continues to be strong, Trump could win another term despite his divisive politics. If it falters or hits a recession, as some economists are predicting, things could end badly for Trump.
How our economy will fare over the next two years is anyone’s guess. What’s not uncertain is that The Steve Pomeranz Show will keep you updated on the economy every week, now through 2020, and beyond. And help you plan your personal finances and savings, every step of the way.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: Well, as I record this, the election just took place the previous night. And with me, to get a sense of what it all means financially, I’ve invited back to the show Rick Newman. He’s a senior columnist at Yahoo! Finance. Welcome back to the show, Rick.
Rick Newman: Thanks, Steve.
Steve Pomeranz: So as I sit here, the market’s up about 300 points, so I don’t know whether it’s a relief rally or whether it’s something more important than that, but what is your take now on the markets? And, especially after this terrible October, what it might mean today that we’re up?
Rick Newman: Well, a couple of things. First of all, the outcome in the midterms was almost exactly what investors expected and what Wall Street expected. So, I mean, it didn’t matter so much from an investor’s perspective to get down into a race-by-race basis, and there certainly were a few surprises here and there. But basically, the outlook was for the House of Representatives to flip from Republican control to Democratic control. That happened.
Steve Pomeranz: Yeah.
Rick Newman: And the outlook was also for the Senate to remain in Republican control and that happened also. So Wall Street, for once, got exactly the outcome it expected. So there’s no surprise here that would push markets in any surprising direction. I think there is also a relief element to this also. I mean, uncertainty has now been removed. And one interesting thing I noticed this morning, with a bunch of the Wall Street notes going around every Wall Street firm is saying, here’s what we think the impact of the midterm outcomes will be, there is actually some relief that there will not be an additional tax cut likely to make its way through Congress. And that might sound a little counter-conventional but here’s the logic.
We know that Congress already cut taxes late last year, Trump signed, it was a big tax cut for corporations. So the worry is that further tax cuts means the US government would have to borrow even more money to cover the difference and that would push interest rates up. So the sort of bank-shot logic here is that if we’re not going to get another tax cut, that’s a little less upward pressure on interest rates. Perhaps that lets the Federal Reserve hold off just a little bit in terms of its tightening. So markets are interpreting that as good news, at least, for today.
Steve Pomeranz: Well, also if you look ahead, and if we do run into recession sometime in 2019, 2020, if the debt is ridiculously high or as high as it’s ever been, it will give the Congress less maneuvering room in order to stimulate the economy. So there’s some worry there that having such a high debt will inhibit the government’s ability to reduce the pain of the next recession.
Rick Newman: You’re certainly right about that. Although I think this has been a concern for such a long time that I think, in terms of financial markets, trying to guess what’s likely to happen tomorrow or the next week or next month, I think financial markets just are not concerned about the level of debt at the US government these days. Now that could change fast if we hit a scenario such as you’ve just described, and all that huge amount of debt, it’s close to $21 trillion now. I think that we’re going to have deficits of probably at least a trillion dollars this year. I mean if that does begin to impact the ability of the United States to do deficit spending, to borrow during a downturn, and do some of that conventional stimulus, for sure that would have a pronounced effect on financial markets. But at least, economists worry about that-
Steve Pomeranz: Yeah, I agree.
Rick Newman: Not too many Wall Street people are worried about that.
Steve Pomeranz: I absolutely agree. I don’t want to belabor by this point, but one final point is that, with the deficit running into trillion dollars a year, I mean, these are normally the deficits you see when the economy is bad and the government is spending. Not when the economy is good. So I think everybody’s waiting to see if lower corporate taxes, some lower individual taxes is going to spur the economy enough to make up the difference. But let’s move on.
Rick Newman: Let’s move, I could talk on and on about it, but let’s move on.
Steve Pomeranz: You wrote a column on November 5th that said, “after hovering for eight months at a B grade on the Yahoo Finance Trumponomics Report Card, that President Trump’s rating has drifted up to a B plus.” Describe that for us.
Rick Newman: Sure, we’ve been tracking the health of the Trump economy, or I guess I should say the economy under Trump, since May of 2017. This is quantitative, so it’s based purely on a methodology we’ve created and the numbers that go into that. We look at things like total employment, manufacturing employment, four other indicators that everybody would understand. And we compare economy under Trump to the performance of the economy under six presidents going back to Richard Nixon, and say how is Trump doing compared to these other presidents at the same point in their term.
Trump had been at a B, that was the grade that the numbers were telling us for the last eight months, and it recently ticked up to a B plus. And the main thing that changed there is his grade for average hourly earnings. when we compare it to the prior president, it actually ticked up a notch. S&P 500, Trump is still the, even despite the, sort of, backsliding in October you just referred to, Trump still gets the second highest mark out of seven presidents on that. And that’s enough to give him a B+. That is a very good grade.
I mean, people would forget this, but the US economy, which was mainly an industrial economy back then, was adding from more jobs in the 1970s under the first couple of years of Jimmy Carter. Hard to believe right now looking back because the Carter presidency didn’t end well. But man, the US economy was creating like twice the number of jobs we see now. And that’s just because it was a totally different economy. So a B plus grade, given the dynamics of today’s economy, I think is very good.
Steve Pomeranz: So maybe there will be a dividend? Maybe there are some early signs that if more people are working, if those people are making more money, they will pay more in taxes. And maybe that theory of trickle-down or whatever you want to call it, will work. We have to wait and see, looking forward-
Rick Newman: I won’t endorse, all I’ll say is I will not endorse that theory, but you’re right, it could happen.
Steve Pomeranz: Yeah, well, I was around during Reagan times and I’m still waiting for the trickle down, so I don’t know that it’s coming. Looking ahead a little bit, how much of the election results had to do with a good economy? We have an excellent economy, and normally, it’s the economy stupid. How would you account for that?
Rick Newman: Yes, it, to me, is a very interesting question. So this looks like a setback for Trump, given that he lost his party, the Republicans lost control of the House, but the Republicans actually outperformed in the midterm elections based on the normal, let’s call it the average, performance of the party in power during midterm elections. They lost fewer seats in the house than is typical for a president whose popularity rating is below 50%, as Trump’s is. And they actually gained seats in the Senate, when what’s normal is a loss of a couple of seats in the Senate for a president with an approval rating in the 50%.
So, while it might not feel like a victory for Republicans, they actually did better than expected compared with historical norms. And I think the reason for that is that the economy is very strong. I mean, interestingly, the economy came in as the third, not the first. It’s usually the first most important issue when you ask voters what they care about the most. This time around it was third. Health care was first, immigration was second, and then came the economy, and we also had a lot of people saying, the economy is in good shape. Almost twice as many people as in 2016, just two years ago, saying the economy is in good shape.
So I think that what that tells me is that there are some voters, I’ve talked with many of them, who really don’t like President Trump, and they don’t like all of his policies, but they do give him credit for a good economy and they just don’t want to break what seems to be working. And so those are votes that I think Trump maybe got, that he wouldn’t get if the economy were weaker. Or they could be people who just felt no need to cast their protest vote in favor of Democrats and may have stayed home. So I think Trump absolutely is benefiting from a strong economy.
Steve Pomeranz: Well, I think 2020 is going to be based on the factor of what the economy is going to be doing at that point. If it’s very good now, I mean, it may stay very good for a long period of time. These trends tend to last a very long time. Especially if unemployment is completely continuing to fall, wages are rising. I mean, these are very good things that don’t turn on a dime. But 2020 is far away, and all kinds of things can happen. And so maybe it will turn into the economy stupid in a couple of years.
Rick Newman: Well, I think the economy will be decisive in 2020, whether it’s a strong economy or a weak economy. We know that Trump is able to sustain what seems to many people, including me, to be a surprisingly high level of support, even if it’s not high by historical standards. I mean, he is so divisive and so controversial, and yet he does seem to have the support of just enough voters to put him barely over the top or maybe close to being over the top. So if the economy is the same in 2020 as it is today, I mean, that will be a good thing for Trump.
Based on what economists are forecasting and a lot of people are worried about, I think the stronger case is that we will have, the economy will probably not be as strong in 2020 as it is today. Most mainstream economic forecasts see the economy weakening, growth getting slower. There are some forecasts for a recession around 2020 or 2021.
I think a big question is whether, if we just have a slowing economy but not a recession, is that something people are really going to feel, or are things going to feel like they’re okay? Are we going to have layoffs, and you’re going to hear about people losing their jobs and companies downsizing, or we’re just going to have a little less hiring that is something people with a job won’t really feel? I think that’s a big question. It’s kind of like where will the economy be on the margins, and a lot of things can and will happen during the next two years.
Steve Pomeranz: Well, there’s so much we can’t tell about the future, especially 2020. So why don’t we leave it at that? Rick Newman, senior columnist at Yahoo! Finance, just trying to give us some insight as to what happened and maybe what’s going to happen in the future. Hey, Rick, thanks for joining us.
Rick Newman: Always enjoy it, thank you.
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