Does fiscal stimulus push stocks up?


President Trump is aiming to pass a fiscal stimulus package by the end of 2017 or early 2018. Such a massive infrastructure project has never been attempted before while the economy is growing nicely: stimulus tends to happen when the economy is climbing out of a recession.
Naturally, this leads to a question. Will fiscal stimulus during good economic times push the U.S. stock market higher, or will it cause hyperinflation and kill equities? Here are the historical times when the U.S. pursued fiscal stimulus:

  1. 1953
  2. 1961
  3. 1969
  4. 1974
  5. 1977
  6. 1981
  7. 1989
  8. 1993
  9. 2008
  10. 2009

The S&P soared for years after 1953.
The S&P crashed in 1962. But this crash was not caused by the fiscal stimulus. Instead, it was caused by JFK’s very public fight against the steel industry, which at the time was still a very important sector of the U.S. stock market. This means that should Trump start a trade war and publicly hurt business sectors, the U.S. stock market will make a big correction in 2017.
The 1969 fiscal stimulus helped the S&P’s bear market end in 1970.
Stocks roared after the 1974 bottom.
Stocks soared after the 1977 bottom. This is a very interesting case. The U.S. economy was still growing, but Carter introduced an increased spending bill (much like the one that Trump wants to introduce today). This caused stocks to rise, even though inflation picked up as well.
Reagan’s 1981 bill helped the S&P bottom in 1982. Bush senior’s 1989 bill did not help stocks. However, this was because the U.S. economy was already on the fast track to a recession. The 1993 bill was not significant. Obama’s 2009 bill helped the economy recover rapidly in 2009.

Conclusion

The conclusion to be drawn from these cases is simple. A fiscal package (i.e. infrastructure spending, corporate and individual tax cuts) is positive for stocks because it’s positive for the economy, barring:

  1. The U.S. economy is ALREADY on its way towards a recession.
  2. A trade war from the President.

Neither of these scenarios seem to be the case right now. The U.S. economy is growing nicely and shows no indications of slowing down. Trump does not seem to want a trade war. He is renegotiating trade deals to make them more favorable for America.

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