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Today is a good day for a non-p-hacked evaluation of the stock market under Trump. I had discussed this with someone during the initial tariff chaos, and wanted to return to it at some point. That conversation ended up using euro prices due to worries about dollar inflation; in the following the brackets always show the data based on euros.
The day of the election, the S&P 500 made +2.5(+4.1)%, from which we can impute between -2.5(-4.1)% and -1.1(-1.8)% for a hypothetical Kamala win, depending on what odds we use for he election. Given the spirit of the exercise, I think we should use the prediction market prices for this, giving the second set of numbers. In reaction to the tariffs, it dropped strongly to a low point of -13.8(-15.4)%, on April 8(21), and after various takebacks recovered quickly to +3.1(+0.7)% on May 16(16). Since then it has shown a relatively linear increase, ending the year at +17.5(+11.1)%. Inflation that year was 3.0(2.1)%. Despite these seemingly similar inflation numbers, there is a significant gap in the final return, and its probably better to use the lower number.
Historically, annual returns were +10.5%, or +6.7% after inflation (those are for dollar only, the euro wasnt around that long, but probably irrelevant over those time scales). So going with the more pessimistic euro numbers, this year was slightly above average in total, or moderately below relative to the post-election price. I think we can take this mostly at face value; because expectations are priced in with stocks, there is much less risk that credit goes to anything that happened earlier, and I dont know what windfall looks like a linear increase. It doesnt seem like the market significantly misjudged Trump on election day.
The most interesting point here to me are the tariffs. Essentially since Trump revived this topic, Ive seen a never ending stream of takes about how very bad they are, an entirely new kind of economic terribleness, etc, and not a single one has claimed a numerical effect size. After asking around for one, the only thing Ive gotten is this, estimating GDP to be -0.6% in the long term based on policy in April (the have an update with more current policy to -0.35%). That seemed low, but from a non-trumpy source I figured thats probably a good sign. And it certainly seems in line with the numbers above now. Overall, I still think tariffs are bad for the economy, but it seems the effect size is still small relative to everything else going on, even with the drastic measures weve seen.
The models aren't accounting for rare upsets. What happens to the market if there is only one factory in the world that makes some component we never have heard of but is super critical for hospitals, food production or airplanes and that factory burns? What happens to the market if there is a major war and the electrical grid relies on spare parts from few places? Bringing production home reduces the risk of extreme downturns so even if the median return is lower the average return is higher due to a smaller risk of extreme negative outcomes.
I recently saw somebody posting his L on some trading forum. He shorted chicken fastfood in Korea, because he thought that the fundamentals of demographic crisis will impact that industry negatively. Then apparently the Nvidia CEO dined in some chicken restaurant in Seoul and it created fried chicken fad, boosting shares of chicken restaurants. He lost everything as he was forced to sell on his margin call.
A black swan event for fried chicken.
Hilarious.
Miser, miser! Modo niger et ustus fortiter!
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I definitely agree that this is a reason to not naively hope for raw "number go up." Other factors affect the overall resilience and robustness of the economy, and might go along with slightly worse numbers in the short term.
I'm certainly in favor of bringing production of certain critical infrastructure home, but have we done a good job of doing that over the last few years?
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