Nobody Knows Why Markets Like Trump
Now that he's in office, Donald Trump faces the challenge of resolving a big disconnect: At no point in the past few decades has investors' optimism about a new president contrasted so sharply with an information void about what he will actually do.
Financial markets have put a lot of faith in Trump. As of inauguration day, the Standard & Poor's 500 Index -- despite a lackluster several weeks -- was up 6.6 percent from Nov. 7, the day before the election. That's a larger gain than under any of the past four presidents-elect. Here's how that looks:
The markets' buoyancy, however, doesn't appear founded in any concrete understanding of how Trump will achieve his goals. His plans for trade, tax reform, infrastructure investment and deregulation remain unclear -- a fog that neither his inaugural address nor the confirmation hearings of his cabinet nominees have done much to dispel.
How bad is the confusion? Consider the index of policy uncertainty, which measures how frequently specific combinations of words -- such as "economy," "uncertain" and "regulation" -- appear in news reports. On average in the week through Friday, the index was 92 percent higher than in the week before Trump's election. That's more than under any of the previous four presidents-elect:
Such a lack of specifics can have real consequences. Research by the economists who created the index -- Scott Baker, Nicholas Bloom and Steven Davis -- suggests that greater uncertainty is associated with lower output and employment, particularly in areas such as defense, health care, finance and infrastructure.
To be sure, a booming stock market and a weak economy are not necessarily mutually exclusive. Investors could simply be expecting policies such as tax reform and deregulation to boost corporate profits, with little regard for the broader effect on growth. At least that's how economists interpreted the market's optimism in a recent poll by the Chicago Booth Business School.
That said, if Trump wants to deliver on his promise to "create a dynamic booming economy," he'll have to get specific very soon.
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