The President and the Market
President Donald Trump takes economic indicators seriously, except when he doesn’t. He’s boasted that recent stock market highs endorse his leadership; before the election, he said it was all a bubble. In the same way, before he took office, low unemployment was a phony number that meant nothing; now it’s a sure sign of success.
In general, stock-market performance is a poor measure of presidential prowess. Still, the president raises interesting questions. Why have U.S. shares done so well since the election, and is there more to come?
If you were smart enough to know the answers, of course, you’d be smart enough not to say. Still, two big factors have lately been at work: the Federal Reserve’s evolving view on inflation and interest rates, and investors’ opinions about how much good or harm the Trump administration might do to the economy. The second point suggests that Trump deserves a share of the credit for the run of recent months -- just as he’ll deserve a share of the blame if and when the market crashes.
Of the two factors, monetary policy has been the main thing up to now. Investors are wondering whether the Fed is altering its plan for getting interest rates back to normal. Unemployment is low, yet the labor market isn’t tightening as you’d expect. There’s a remaining pool of so-called discouraged workers that could be drawn back in, helping to offset pressure on wages. Labor costs aren’t accelerating appreciably and inflation is still under target.
All this might delay the Fed’s efforts to normalize monetary policy. Much of a delay would be a mistake, but that’s not the point. If the Fed is hesitating to raise interest rates, that helps justify the current mood of optimism. It also pushes down the dollar, which boosts the foreign earnings of U.S. companies.
The Trump factor also contains a rational component. For investors, the paralysis in Washington is roughly neutral, because actual policy out of Washington could go either way: Up to a point, no news is good news. Meanwhile, the Trump presidency increases the possibility of lower corporate taxes, and Trump’s officials have begun to roll back economic regulation where they can. It’s still unclear what this assault on regulation will amount to, or how far the changes will be smart policy, but compared with the status quo it’s likely to be good for profits.
So the post-election upswing in share prices isn’t all that puzzling in itself. Nonetheless, it looks fragile. When it began, overall valuation measures (such as Robert Shiller’s cyclically adjusted price-to-earnings ratio) were already at readings that signal low future returns. Each successive upward move pushes prices further into risky terrain.
When markets are so adventurously valued, they’re especially vulnerable to shocks. A change in sentiment on inflation is all too possible: One or two discouraging numbers, and the prevailing view on the Fed might flip in an instant from “They can afford to be patient” to “Why did they delay and delay?” Suddenly, rate increases will be hurried forward, not put back -- and at these market levels, there’s a long way to fall.
Speaking of shocks, there’s also President Trump, not noted for a sure and steady hand. As he blusters to and fro, responding impulsively to challenges like North Korea that demand careful analysis and calm judgment, the danger is self-evident. Stock prices retreated from their record highs last week, as investors followed the president’s war of words with Pyongyang. If only the risk were confined to the stock market.
When share prices next tank, Trump can be expected to reconsider just how much influence the White House exerts. But rest easy: With luck, there’ll be some other metric to prove what a fabulous job he’s doing.
--Editors: Clive Crook, Mary Duenwald.
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