Rematch 2024: What can investors learn from Biden and Trump's first terms?
Fiduciary Trust International
Growing and protecting wealth for generations
Not since the U.S. presidential election of 1892 have two presidents faced off in a general election. Back then, one candidate was the incumbent, while the other was looking for a rematch after being voted out in the prior election. Sound familiar?
We know that anything can happen in a normal presidential election year, and there are already indications that 2024 may shape up to be particularly unusual. Nevertheless, the referenceable first terms of the leading candidates—Presidents Biden and Trump—provide observers with a tangible idea about how they may govern, manage the economy, and how their administrations may be received by financial markets in a second term.
But first, a pandemic-sized caveat: the impacts of the Trump administration’s first three years can be evaluated with an objective lens before we run into the major distortions associated with COVID-19. President Biden’s tenure is subject to a similar but less-clear-cut delineation as economic re-opening progressed throughout the first half of his presidency.
Presidential priorities
The major policy triumph under unified Republican Party control at the beginning of President Trump’s administration was the passage of the Tax Cuts and Jobs Act in late 2017. Taxes for individuals and corporations were reduced by about $1.4 trillion over a decade, catalyzing a reflationary trend that represented the first firm inflationary impulse of the post-Global Financial Crisis (post-GFC) era.
Reshoring U.S. manufacturing by erecting trade barriers was also a centerpiece of the Trump administration’s economic policy. The executive branch imposed import tariffs on a range of commodities and goods starting in early 2018, with a large share of the burden shouldered by U.S.-China trade. Roughly $350 billion of U.S. imports from China were subjected to new or increased tariffs in a trade war that invited about $100 billion in retaliatory tariffs on U.S. exports.1 These tariffs increased the cost of trade without significantly altering its balance or shrinking the U.S. trade deficit with China.
The Biden administration’s economic priorities came together across three laws in 2021 and 2022 during a period of unified Democratic Party control:
Economic impact
U.S. GDP averaged 2.8% at a seasonally adjusted annual rate from 2017 through 2019, an improvement over the post-GFC trend. Still, there were no noticeable benefits for U.S. manufacturing from Trump’s tariffs, with data showing growth giving way to a manufacturing recession during the tariff imposition period.
Exhibit 1: U.S. manufacturing during the pre-pandemic Trump administration
The lacking evidence of a positive impact on U.S. manufacturing or trade is meaningful. Tariffs raise the cost of goods, essentially functioning as a tax on U.S. consumers and thereby weighing on demand, while domestic manufacturing requires capital investment and time to compete with overseas manufacturers. The Biden administration has retained most of Trump’s tariffs, but a larger and more broad-based tariff regime appears to be the heart of Trump’s second-term economic platform.
During Biden’s tenure, GDP averaged between 1.9% and 3.0% through 2023 depending on when we start in 2021 or 2022 to mitigate pandemic impacts. Biden was effective at translating his platform into law, but the market has begun signaling that the days of consequence-free unchecked government spending may be numbered. And while the slightly less than $1 trillion in new spending from Biden’s three signature laws pales in comparison to $5 trillion in emergency pandemic spending, the willingness to continue running large deficits in 2022 and 2023 raises the question whether budget discipline would be a priority in a second Biden administration.
Market impact
Financial markets incorporate global developments and massive amounts of information, only some of which are reflective of presidential decisions. Combined with pandemic-era influences, we are conscious of deriving too much value from market analysis.
Truthfully, the last seven years of U.S. equity performance lines up better with Federal Reserve (Fed) monetary policy than successes or failures emanating from the White House.
Exhibit 2: Fed rate policy holds significant sway over U.S. equities
The “Trump reflation” rally in 2017 transformed a nascent effort by the Fed to normalize rates after spending seven years near zero into a full-fledged cycle of rate increases. A significant selloff in 2018 was mostly erased at year end when the Fed capitulated and then remained on hold through 2019.
Markets were a rollercoaster during the pandemic era, but ultimately quite positive, until the inflationary surge of 2021 and 2022 prompted the sharpest rate-hiking cycle in four decades, triggering a selloff. 2023, like late 2018 and 2019, hosted a Fed-pause-induced relief rally.
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Finding common ground
The world has changed meaningfully over the eight years since the 2016 election. We’re struck by four important observations:
Fiscal policy has run amok. Both candidates have track records of prioritizing their agendas at the expense of a growing budget deficit. Even if we exclude the pandemic period, each managed to increase deficits throughout their terms. Ballooning U.S. government debt will become increasingly difficult to unwind as time elapses.
Exhibit 3: Federal deficits begin to strain Treasury market
We don’t need to make a value judgement on this approach to fiscal governance—markets have begun to do just that. Bond investors were unwelcoming last summer as Treasury issuance outstripped expectations, pushing the average interest rate on federal debt service to the highest level since 2010.2
Peak globalization has given way to deglobalization. We can think about the period preceding Trump’s tariffs as peak globalization. The Biden administration’s focus on developing domestic industrial capacity for tech hardware and clean energy are also evidence that deglobalization is well underway. In this sense, both administrations moved to protect U.S. interests, albeit in different ways, as the world was being reshaped by the bipolar U.S.-China power dynamic.
The spirit of bipartisanship has hit new lows. We could have made the same point in 2016, but political dysfunction seems worse now. There’s limited ability to avoid budgetary brinksmanship, let alone find consensus and craft sensible policy.
Both candidates would be lame ducks on day one of a second term. Whether that will manifest in a diminished ability to extract concessions or an increased willingness to take risks without personal consequences probably comes down to the candidate’s governing style.
They also face a significant likelihood of sharing power. Polls and projections show toss-ups for the presidency and control of the House of Representatives, while Senate control appears to be leaning Republican given that Democrats hold 23 of the 34 seats up for election.3
Deglobalization and the lack of incentive to reduce federal deficits represent challenges that will remain with us no matter who wins in November. And for all the focus on character and capability, we’re confident the winner will have a team determined to see through their priorities.
One last point of bipartisan praise: both Trump and Biden presided over a return to the lowest unemployment rates since the late 1960s. The high likelihood of continuity—one way or the other—may mean that the trend of benefits accruing to Main Street gets a shot at four more years.
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