With Donald Trump’s decisive victory in Indiana last night, and Hillary Clinton looking like she will be the inevitable Democratic nominee, we finally know the November presidential match-up.
And what's that mean for markets and the economy? Maybe less than most voters and investors believe.
The occupant of the Oval Office gets way too much credit during good times and way too much blame during bad times. George H. W. Bush and Jimmy Carter were both tossed out amid public perceptions of their poor economic stewardship. When Carter came into office, inflation was building to a record high and a surge in oil prices caused by an embargo was having its pernicious effect. Consider that as Bush was on his way to losing his re-election in 1992, the economy was already recovering from the 1990-91 recession, and was on its way to some of the strongest growth since World War II. Voters failed to see this, and they then probably gave Bill Clinton too much credit for the economic rebound when he ran for re-election in 1996.
But I don't want to suggest that presidents are not and cannot be significant. There are times where specific presidential actions and policies have far-reaching consequences, leading to outcomes that can be positive or negative. Consider these recent examples:
• Ronald Reagan’s tax cuts and government spending were enormously stimulative, helping fuel economic growth and lifting the stock market. But his fiscal policies also created huge deficits, and helped to accelerate income inequality. Oh, and he appointed Alan Greenspan as Federal Reserve chairman (whatever your own thoughts are about “the maestro,” we cannot claim this was an inconsequential appointment).
• Clinton raised taxes, balanced the budget and reformed welfare, all of which had an impact on markets. He also signed off on the repeal of an important part of the Glass-Steagall Act, which separated commercial and investment banking, and the Commodity Futures Modernization Act, which limited regulation of certain derivatives. Both laws played a role in intensifying the financial crisis.
• George W. Bush passed large tax cuts, stimulating the economy but also adding to the federal deficit. He spent $3 trillion invading the wrong country after the 9/11 attack, digging the fiscal hole deeper. His appointees to federal agencies and departments advocated policies that contributed to the credit crisis.
• Barack Obama passed the Affordable Care Act, which had a huge impact on the heath-care market. His 2009 economic stimulus plan in response to the Great Recession stimulus has been criticized as too small, leading to a mediocre recovery. The impact of the Dodd-Frank Act on Wall Street has been broad and may be contributing to a decline in financial industry profitability.
Given this, it would be foolish to suggest that presidents are not potentially important to the economy or markets. It's just that the U.S economy is so large and markets so good at discounting future cash flows that anything a president does will run into countervailing forces.
But as our examples above show, presidents can have an impact, for better or worse.