June 19, 2017
Let me tell you about two U.S. presidents. One could be characterized as unconventional, not terribly political, elected to battle an uncertain economy and generally shake things up.
The other is Donald Trump. Who is the first president I described? None other than Ronald Reagan.
Both men were elected to lead in turbulent times, but there are stark differences between the early 1980’s and today.
For instance, investors during the initial Reagan years had to assess his policies to see if they could bring sustainable growth. After all, inflation and unemployment were both high, and market returns were largely flat for a decade.
The cyclically adjusted price-to-earnings ratio (or CAPE ratio) hovered between seven and nine then. Generally speaking, a lower CAPE ratio indicates lower market values. For reference, CAPE ratios below 10 are so rare, they’ve only happened 8 percent of the time, going back to 1885.
In addition, back then, all the popular thinking indicated nothing would change soon, if ever.
Today, our president is anything but typical. He’s bringing new ideas to remedy our economy, though public support is marginal. And there is no doubt President Trump lacks Reagan’s humility, optimism and diplomatic acumen. It’s no wonder his approval rating is the lowest among new presidents.
The CAPE ratio is now above 29, about where it was in 1929. The only time it has ever been higher was right before the dot-com bubble in 2000. When it was less than 10 under Reagan, that meant investors needed faith that an underperforming market would turn for the better. At 25, it means investors must believe the market will deliver huge gains to keep growth trending positively.
That is a stark difference between the two chief executives. And given the data, it feels like we’re bound to lose.