On November 9th I wrote to you with my early thoughts on the election of Donald Trump as the next president of the United States. In that letter, [see November 9th blog post], I expressed surprise that he had been elected and caution about the potential repercussions of that on the US and global economies and financial markets. Most experts did not expect a Trump victory and almost everyone expected markets to tank should he have won. They were wrong on both fronts. The US stock market has rallied massively since election day, with the Dow Jones Industrial Average increasing 7.8% and the S&P 500 increasing 4.6%. The bond market reacted aggressively as well, with the yield on the US 10-year bond increasing from 1.85% the day of the election to 2.44% at yearend. If you want to take one lesson only from this episode, it should be on the perils of trying to forecast the market in the short term. (Oaktree’s Howard Marks wrote an excellent memo on that right after the election, you can read it here.)
It seems that investors have changed their opinion on what a Trump administration means for the economy. The consensus now is that Trump will reduce taxes, deregulate industries and spend massively on infrastructure, accelerating both economic growth and inflation. That, in turn, would supposedly be good for stocks and bad for bonds. I am still not convinced. It’s not that I disagree, I just think it’s too early to tell. I believe that the market has prematurely reached this conclusion based on flimsy evidence. Not only do we still not really know what Trump wants to do—even he may not—but more importantly there are practical limitations to many of his plans such as the US being a democracy where one individual cannot dictate everything and other limitations such as the time required to actually get any task completed.
Trump’s victory, however, must be viewed as another piece of the 2016 populist-anger puzzle. The other pieces include the Brexit vote and the rise of isolationists in Europe and elsewhere. Humanity has advanced tremendously over the past century and today is, by far, the best time in human history to be alive (if you’re not convinced, see this: A history of global living conditions in 5 charts). But while collectively we are better off, too many people have been left behind over the past 20 years. Those whose jobs have been displaced by globalization should have been retrained with new job skills. Instead, they were left to suffer and today they are very angry, and rightfully so.
It is incredibly important for all of us, however, to learn the right lessons from what’s happened. The free market system is one of humanity’s (nature’s?) greatest inventions and it’s exceptionally good at advancing collective wealth. But it also creates winners and losers in the short term, and we need to admit that, and put policies in place to help those on the losing side with social safety nets, retraining, and education. We must not turn our backs on the free markets system and the values of liberalism and open societies. We need to find fixes that are fair to everyone, but we must not kill the goose that lays the golden eggs.
First published in Mayar Fund’s Letter to Partners – December 2016 (portions have been redacted)