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?
Hi! Thank you for writing. Great thoughts from our other advisors! I’d like to add to them. Your point is excellent – President Trump’s tweets and speeches that seem unrelated to the stock market do affect it. However, many other “unrelated” words, actions, and events also seem to disproportionately affect market movements. While our economy is certainly affected by concrete economic news, it’s also affected by many other less concrete actions and also by perceptions and often unfounded worries. An analogy, for those of you who have teenage daughters, might be a minor comment from a girlfriend to your daughter that in reality has no significance or meaning but sets off a torrent of tears, upset, and drama far out of proportion to the actual comment. In time, things even out, but what a ride while you are waiting out the storm!
The stock market is acted on by human investors with feelings and worries who are affected by emotion and not always governed by impartial facts. That makes it susceptible to all sorts of “unrelated” factors – also called “noise.” As our other advisors have written, following a long-term investing plan with good diversification and trying not to listen to the noise can help. Please write to us again if we can help!
It's important to recognize that you are referring to media forecasts about what the markets will do – not what the markets are actually doing. Those “reporters” who are warning about the “negative impact” of Trump’s statements are simply engaging in fear-mongering for political purposes. They want the President to look bad, so they are trying to get the public to believe he is having a destructive effect on our economy.
Of course, people with such bias are barely qualified to be called journalists, let alone financial analysts. It's good that you went to Investopedia to get some professional opinions. I also recommend Forbes and The Wall Street Journal.
Actually, if there was going to be a negative effect from any of Trump's bloviations it would already have happened. The market ignores them because it is focused on reality -- earnings, consumer confidence, economic growth. I don't think anyone really expects any of Trump's agenda to be put in place -- and that includes a tax cut/reform -- so if the market is going to get hit it will happen in reaction to something unexpected. People expect Trump to rant like the drunk at the end of the bar and the markets pay no mind to it.
Presidential utterances have the potential to affect equity markets. Generally, their impact is transitory and does not materially change the course of economics, which is what really drives equity valuations.
I find your question interesting because President Trump is anything but a "regular" president. His remarks are often insensitive and sometimes offensive. When those remarks are aimed at other politicians or at US cultural issues/problems, my guess is that their market impact should be and remain limited. What worries me most, from a money management standpoint, is that when he targets international problems or politicians his remarks carry with them potentially more damaging consequences. The recent North Korea spat is one of those events. Based on our president's behavior during this incident, I have decided to cut US equity allocations by 5% across the portfolios that I manage. I do not know when the next international crisis will come and what it will be but I have an inlking that managing it the way this last one was managed will not be without negative consequences.
In that context, marginally reducing risk (market exposure) makes sense to me. Pricing geopolitical risk for portfolio management purpose is a notoriously complex and perhaps even an impossible task. Nevertheless, it exists and President Trump's approach (style and substance) to managing our country is, in my view, a geopolitical risk.
I hope this helps.
The answer to the question is most likely yes, but no one knows exactly how they affect things. On a daily, weekly and monthly basis, most of the movements in stock markets are due to noise, which would include political discussions. Over the long term, markets and individual investments move in relation to the underlying economic fundamentals of the individual companies involved and the broader economy. With hundreds of million of market participants globally, it is impossible to tell how they will or won't react to anything that Trump or any other politician might say. My advice is to develop a sound long term strategy and forget about the short term market movements caused by noise.