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Trick or Trump: Do Stock Market Gains Offset the National Debt?

Louis BasenesePresident Trump just made a rather interesting, borderline-odd claim.

I realize that Mr. Trump making outrageous claims is nothing especially newsworthy.

But this one is such an original thought that it warrants our attention.

The president said that the recent stock market gains offset the national debt:

As you know, the last eight years, [the federal government] borrowed more than it did in the whole history of our country… They borrowed more than $10 trillion, right? And yet we picked up $5.2 trillion just in the stock market. Possibly picked up the whole thing in terms of the first nine months in terms of value.

Many fear that America’s $20.4 trillion debt crisis is more worrisome than ever.

So is Trump’s claim a trick… or a treat?

Here’s what you need to know now.

Gambling in a Dangerous Game

Martin HutchinsonPresident Trump’s claim has all the solidity of a financing plan from an Atlantic City casino.

At the current point in the cycle, with unemployment close to 4%, the U.S. budget should be in surplus.

In reality, however, the budget deficit for the year to September 2017 was $666 billion.

And Trump’s own tax plan is expected to blow out the deficit by an additional $1.5 trillion over the next 10 years.

And simply cheerleading about all the additional growth we’re going to get won’t help. For the last two quarters, we have been at the 3% growth President Trump promised. Yet the deficit is some $200 billion higher than originally projected.

So on the debt side, that $20 trillion in debt Lou mentioned above is projected to grow by close to $1 trillion a year — every year to infinity.

That figure will get worse with the baby boomers now retiring in droves since Social Security and Medicare run ever-increasing deficits. Not to mention the next economic downturn, which — with present policies — will blow the deficit out to $2 trillion a year.

In other words, the national debt isn’t something we should easily dismiss. Ignoring it certainly won’t solve the problem. And the stock market won’t either…

On the equity side, Trump likes to trumpet about the increase in stock values since he took office.

The problem is, stocks were already overvalued by historical standards in November 2016. So the current rise is just setting us up for a bigger crash when the inevitable correction comes.

Most of these issues aren’t President Trump’s fault. They’re the result of two decades of foolish policies.

But either way, when it comes to Trump’s outlandish claims, it’s trick — not treat!

It Goes Both Ways…

Jonathan RodriguezFirst, let’s tackle the debt side of the equation here…

America’s $20 trillion debt load is a big deal.

But even factoring in silly political posturing in Washington, we’re in no real danger of default anytime soon.

Granted, the U.S. currently owns a debt-to-GDP ratio of 104%, just shy of an all-time high. But China — one of the world’s fastest-growing large nations — sports a debt-to-GDP of more than 300%.

In other words, a credit crisis is more likely to occur overseas than here in the States.

And as Hutch mentioned above, the president loves to take credit for the “bigly” post-election stock market gains.

But things were already looking up for equities before Trump’s election.

Indeed, American companies experienced five consecutive quarters of earnings declines from 2015–16. Yet in the third quarter of 2016 — just before the presidential election — earnings broke out of their slump to the upside.

Investors were also comfortable with the Federal Reserve’s slow path of small interest rate hikes — a key point of uncertainty over the last few years.

With that said, the market did price in a lot of hype based on Trump legislative initiatives. I’m talking about tax reform, infrastructure spending and a massive defense-spending package.

But a stock’s price follows the direction of its earnings growth — with few exceptions. As long as earnings are growing, the stock market will rise.

So President Trump can take credit for some of the market’s price action, but not all of the momentum is his doing.

Besides, here’s the catch with taking credit for the market’s rise…

If the big-ticket legislative items don’t get passed in Congress, stocks will surely sink in the short term.

Ultimately, Trump will have to own those losses, too.

Verdict: Trick!

A Word of Advice

Louis BasenesePresident Trump — and for that matter most politicians — would be wise to follow the wisdom of the late President Ronald Reagan: “There is no limit to the amount of good you can do if you don’t care who gets the credit.”

We need less bragging and more action in Washington, D.C.


Without it, our national debt promises to keep ballooning higher and higher.

Of course, we live in a debt-addicted world, so it’s all relative. As Jonathan pointed out, as long as our debt-to-GDP ratio comes in lower than other major economic powers, all is well in the short to intermediate term.

At some point, though, all the debt will come back to haunt the world’s superpowers.

As for divining that day — along with the exact hour that the stock markets collapse as a result of all the debt — I’ll let the doom-and-gloomers keep trying to guess. It’s a fool’s errand.

Our time will be much better spent identifying and filling our portfolios with individual companies with strong and growing earnings.

Ahead of the tape,

Louis Basenese
Chief Investment Strategist, Wall Street Daily