Do Trump's words/speeches affect the markets?
As a recent example, after Trump's speech about the Charlottesville riots, news exploded about the negative impact it would have on the markets. Why is it when Trump talks about things seemingly unrelated to finance, the markets still react?
Unfortunately, most information in the media will affect the market at the very least for the short term. Perceptions and emotions move individual stock prices and the overall market in the near term. If investors feel that good times are ahead for the economy and/or an individual company, the prices of those securities will probably go up until that perception changes. Investors’ perceptions and emotions are heavily influenced by news and the media. So when the government reports one day that unemployment is dropping, the market could do well that day.
But if another negative report is released the very next day on a potential increase in inflation, the market may decline. Additionally, there are quite a few news stories that are released throughout the day with many different forces at work which may move the market and stock prices at any given time including but not limited to the White House or President Trump.
Over the long term, feelings, thoughts and emotions have almost nothing to do with the market. It is all about real profits and interest rates. When you own stock in a company you really own a small percentage of a business. As the business becomes more profitable, the value rises. What people think or feel about the future of a company will impact its stock price over the short term. But the actual profits of the company will determine the stock price over the long term.
History shows that what presidents say have little market impact, including our current president. There are things they say that can affect markets like having a sound economic plan including tax reform or other business incentives. However, it can be challenging to assess whether what presidents say have an impact. If they do, then it is generally very short term in nature. The media tends to hype things up for better or worse, but mostly for worse in my opinion. The best medicine for any of these distractions is having a well-diversified portfolio that includes stocks, bonds, and cash. The appropriate mix of the three asset classes is different for each investor, but reacting to every word that comes out of Washington DC is a recipe for failure.
At the beginning of this year, when the president appeared to have solid backing from both the Congress and his supporters, there was considerable optimish for programs to help boost the economy. Since then, little progress has been made on the promised programs, but the spate of ongoing alienations of key administration officials and world leaders has lead to decreasing support across the board. When the speeches undermine support, there is increased concern that what has been promised with come to pass.
The key program ahead is tax reform and reduced tax rates. If speeches continue to widen the president's rift with Congress, that could undermine prospective tax legislation. For that reason, inflammatory speeches may cause unfavorable market reactions.
This is a very keen observation on your part that can be very frustrating to investors. One major reason why markets react to news that seemly have nothing to do with finance is human emotion. Investors are people and therefore often make buying and selling decisions based on potential personal return or fear of loss.
That is why it is especially important with stocks to adjust your allocation based on your goals and time horizon so it can withstand temporary dips and allow enough recovery time (without selling prematurely). One way to counteract news impacts is proper diversification (e.g. ETF portfolio and appropriate allocations between stocks and bonds).
The market is comprised of millions of free-acting participants. It is impossible to know what is causing them to act.
The media often make up and assign explanations to market moves to generate viewer interest.
Remember, the business of financial media like CNBC and others is advertising, not financial advice. The more viewers they have the more advertising revenues they generate for themselves.
Fiduciary Financial Advisor