From "Reagan's Great Cycle" to "Trump's Great Cycle": The Unchanging and the Changing

With less than two months remaining until Trump officially begins his second term, the market has mixed opinions on the economic situation after Trump takes office. Analysts Zhong Zhengsheng, Zhang Lu, and Fan Chengkai from Ping An Securities stated in their report "From 'Reagan Cycle' to 'Trump Cycle': The Unchanging and the Changing" published on November 29:

“The 'Trump Cycle' may be more unstable, and it remains to be seen whether the U.S. economy can continue to maintain a 'no recession, no inflation' pattern, especially with the risks of recurring inflation that are worth being vigilant about.”

In terms of asset performance, Ping An Securities believes that during the Reagan Cycle and Trump 1.0 Cycle, the common characteristics of asset performance were that U.S. Treasury yields rose first and then fell, U.S. stocks were generally positive, the U.S. dollar was relatively strong, and gold was weak at first and then strong.

Looking ahead to Trump's second term, inflation risks may lead to higher U.S. Treasury yields and increased volatility in U.S. stocks, while escalating trade protectionism may strengthen the U.S. dollar in the short term, and the forces of 'de-dollarization' are more likely to support gold prices in the medium term.

Revisiting the "Reagan Cycle"

Ping An Securities pointed out that the "Reagan Cycle" refers to the economic landscape of the United States during Reagan's presidency from 1982 to 1985, characterized by strong economic growth, a strong currency, large budget deficits, and significant trade deficits reinforcing each other. During this period, the U.S. achieved economic growth without inflation.

When Reagan took office, the U.S. was experiencing "stagflation," with a severe economic recession. He promoted economic recovery and expansion through tax cuts, reduced government spending (especially in non-defense areas), deregulation, and supply-side reforms. Specifically, the "Reagan Cycle" had several key transmission paths:

1. Reagan's tax cut policy believed that appropriate tax reductions could stimulate economic growth and expand the tax base, with tax revenue expected to increase. His tax cuts slowed the pace of deficit expansion, providing the U.S. government with more ample spending space.

2. The Federal Reserve, led by Volcker, strictly controlled the money supply and pushed interest rates up, attracting foreign capital inflows and supporting a strong U.S. dollar, which in turn encouraged further capital inflows, forming a positive cycle.

3. The growth of U.S. consumer demand naturally drove the growth of import demand; under the support of a strong dollar, imports increased, and trade deficits further widened.

4. The Reagan administration significantly increased defense spending to counter the Soviet Union, exacerbating the fiscal deficit. However, defense spending could boost domestic demand and consolidate the position of a strong dollar.

5. The growth in demand itself created upward inflationary pressure, and the Federal Reserve's tightening policy helped stabilize inflation expectations and curb rapid price increases. A strong dollar also helped alleviate domestic inflationary pressures.

In the later years of Reagan's presidency from 1986 to 1989, the U.S. continued to maintain an economic environment of "no recession, no inflation," marking the beginning of a twenty-year "Great Stability" era. However, the "Reagan Cycle" did not continue, as "high interest rates" began to ease in the second half of 1984, the "strong dollar" turned, and the U.S. dollar index fell below 100 in 1987; the U.S. deficit ended its expansion, and the trade deficit also began to narrow

The Degree of "Trump 1.0 Cycle" is Clearly Weaker than "Reagan Cycle"

So what are the similarities and differences between the policies adopted during Trump's presidency and those during Reagan's? Ping An Securities stated that both Trump and Reagan adopted a combination of "tax cuts + strong national defense" in their domestic and foreign policies, and both administrations exhibited a policy mix of "loose fiscal + tight monetary" during their tenures.

However, although both Reagan and Trump aimed to expand exports, Trump adopted more aggressive and direct (tariff) trade protection measures. In terms of attitude towards the dollar, the two appeared "different on the surface, but similar in essence," as both largely allowed the dollar to strengthen naturally while also paying attention to the negative impact of an overly strong exchange rate on trade.

Analysis suggests that the "Trump 1.0" cycle exhibited economic conditions similar to those during the "Reagan Cycle"; however, in terms of deficit expansion, high interest rates, strong dollar, and trade deficits, the degree of the "Trump Cycle" is clearly weaker than the "Reagan Cycle." Specifically:

During the tenures of Trump and Reagan, the economy remained relatively strong, and neither fell into the recession zone defined by the National Bureau of Economic Research, with average GDP growth rates of 2.6% and 5.2%, respectively.

During both administrations, the U.S. government deficit rate increased, but the expansion of the deficit was more pronounced during Reagan's time.

Both periods established a cycle of "high interest rates, capital inflow, and strong dollar," but the increase in interest rates and the strengthening of the dollar were significantly higher during Reagan's era.

Both periods experienced an expansion of trade deficits, but the speed of trade deficit expansion was noticeably faster during Reagan's time.

In terms of asset performance, during both "big cycles," the 10-year U.S. Treasury yield showed similar trends, first rising and then falling, closely following changes in monetary policy, and both experienced the Federal Reserve's transition from rate hikes to cuts; the overall performance of U.S. stocks was also very positive, with technology stocks shining, and the annualized return of the S&P 500 index reaching as high as 12-13%. However, towards the end of the "Reagan Cycle," the "Black Monday" of 1987 occurred, with the Dow Jones Industrial Average dropping 22.6% in a single day.

Regarding the dollar and gold, from 1983 to 1987, alongside the formation and dissolution of the "Reagan Cycle," gold prices followed the dollar, showing an inverted V-shaped trend. In 2017, at the beginning of Trump's presidency, the dollar index declined, and during the "Trump Cycle" from 2018 to 2019, the dollar strengthened, but to a lesser extent than during Reagan's time. The explanatory power of the dollar over gold prices weakened, with gold prices first fluctuating and then strengthening, and the Federal Reserve's rate cuts had a more pronounced uplifting effect on gold prices.

The "Trump 2.0 Cycle" May Be More Unstable

Regarding Trump 2.0, Ping An Securities believes that the "Trump Cycle" may be more unstable, and the benefits of tax cut policies may be less obvious. If tax cut policies lead to a significant decline in tax revenue, it would naturally increase the pressure for deficit expansion, ultimately limiting the government's ability to spend and weakening the cycle between deficit expansion and economic growth At the same time, the pressure of expanding fiscal deficits will also be greater. Currently, the deficit level in the United States has reached historically high levels. According to OECD standards (including forecasts), the general government deficit rates for the U.S. in 2024 and 2025 are projected to be 7.6% and 7.7%, respectively, higher than during the Reagan and Trump 1.0 administrations. The Tax Foundation estimates that Trump's tax reduction policy is expected to ultimately expand the deficit by $3.8 trillion over the next 10 years.

Moreover, the level of trade protection may deepen, making it more difficult to expand the trade deficit. As of September this year, the cumulative trade deficit in the United States has expanded by 12% year-on-year, and compared to the same period in 2019, it has expanded by 52%. The new tariff policy revealed by Trump during his campaign is significantly more aggressive than during his first term. According to PIIE estimates, under the scenario of "10% baseline tariffs + trade partner countermeasures," the trade deficit as a percentage of GDP may narrow by 0.5-0.7 percentage points from 2025 to 2028.

Additionally, the risk of inflation under Trump 2.0 is higher, as trade protection raises costs, and the independence of monetary policy may weaken. Currently, U.S. inflation is more similar to that during the Reagan era, having significantly retreated from its peak but still above the 2% target. However, Trump's previously expressed vision of intervening in monetary policy may increase the risk of premature monetary easing leading to recurring inflation. If prices cannot stabilize, the risk of economic fluctuations in the U.S. will rise, and international capital's confidence in the dollar may wane, all of which will further undermine the foundation of the "big cycle."

In terms of asset performance, Ping An Securities expects that under Trump 2.0, U.S. Treasury yields may still exhibit a "high first, low later" trend, as the boundaries of fiscal expansion's support for the economy become apparent, coupled with the cumulative negative effects of high inflation and high interest rates on the real economy. The "Trump big cycle" may face an end or even a reversal, prompting the Federal Reserve to timely increase interest rate cuts, driving U.S. Treasury yields back down. The overall direction of the U.S. stock market is still expected to be positive, but the risk of "recurring inflation" may increase stock market volatility, and excessively high Treasury yields may adversely affect the U.S. stock market.

The dollar may continue to be strong, but there are also limits. If trade protection policies trigger recurring and uncontrollable inflation, the credibility of the dollar may face greater challenges, and changes in Trump's statements regarding the strength of the dollar may also exacerbate fluctuations in the dollar exchange rate.

Gold prices may initially weaken and then strengthen. In the short term, the strong dollar exchange rate and U.S. Treasury yields may put pressure on gold prices, and factors "outside the dollar system" have also begun to influence gold prices. Trump's new round of fiscal expansion and trade protection may provide additional support for gold prices. After the "Trump big cycle" approaches its end, declining interest rates and a weakening dollar may further boost gold prices