Disclaimer: none of the following is meant to be political analysis. I am not endorsing nor disparaging any candidate. I’m simply outlining my framework for how I see this election and what the markets are suggesting the outcome will be.

Over the last two weeks I’ve outlined why I believe the markets are predicting President Trump will win on November 3, 2020.

So, with that outcome in mind, today I want to explore what will happen to stocks if this happens.

If President Trump does win a second term, I believe the stock market will launch into an ENORMOUS bubble.

Why?

Because President Trump is OBSESSED with the stock market. He’s mentioned it 52 times on his Twitter account this year alone. That’s more than once a week!

Why this obsession?

Because the President knows it’s a simple measure of wealth that appeals to the average person. Talking about boosting incomes or reducing wage disparities sounds nice, but these are vague concepts.

Saying “stocks are at record highs!” is a specific measure that anyone can understand and interpret to mean “people are getting rich.”

The President, for all his flaws, knows how to sell. And by talking about stocks non-stop, he’s “selling” Americans on the idea that he is creating wealth, even if the reality is the market is rising because the Fed is creating record amounts of liquidity.

Bullying the Fed

Speaking of the Fed, President Trump now effectively decides Fed policy thanks to his constant bullying via his very same Twitter account (and its 87 million followers).

Case in point… take note of how the President hounded the Federal Reserve to ease monetary conditions non-stop throughout 2018. The tweets below are two of literally dozens in which the President harangued the Fed to ease monetary conditions.

When the Fed was slow to act, the President even went so far as to the float the idea of FIRING Fed Chairman Jerome Powell, leaking the plan to Bloomberg.

I do not expect any of the above-mentioned issues to change during a Trump second term. If anything, I would expect President Trump’s obsession with stocks to be ever greater. And this means even more pressure on the Fed to create a bubble

Again, I’m NOT saying this is a good thing. Nor am I saying I like what the President does. I’m simply pointing out how he sees the stock market and what this means for his attitude towards the ultimate driver of stocks: Fed liquidity.

How High Could this Bubble Inflate?

So… if President Trump does win a second term, what would his obsession with stocks mean price-wise?

Well, the Fed has cut interest rates to ZERO and is now running quantitative easing (QE) programs equal to $125 billion per month. Moreover, Fed Chairman Jerome Powell has stated that the Fed will not attempt to normalize Fed policy until the U.S. economy has experienced a full recovery to levels that existed prior to the COVID-19 pandemic. And the Fed as a whole stated that it will keep interest rates at ZERO through 2023.

Yes, 2023.

The last time the Fed held rates at ZERO for years while running aggressive QE programs was from 2008-2015. During that time, the S&P 500 nearly TRIPLED.

Currently stocks are up 50% from their March lows. If the S&P 500 were to follow a similar move, we'd see the mother of all bubbles with the S&P 500 rising to over 6,000 over the next five years.

And if things REALLY get out of control, as they did in the late ‘90s, we could see the S&P 500 running to 10,000 or higher. This sounds ridiculous, but this kind of move has happened before. Indeed, the market rose over 140% in just four years during Bill Clinton’s second term as President.

With the S&P 500 around 3,500 today, this would mean a run to 8,400 by the end of 2024.

Again, this sounds ridiculous, but all bubbles do. And we know this President, more than any other in the last 50 years, is obsessed with stocks. Combine this with a Federal Reserve that is already engaged in the most aggressive QE program in history and suddenly the S&P 500 at 8,000 in four years doesn’t seem so ridiculous.

Best Regards,

Graham Summers
Editor, Money & Crisis