What is the direct correlation between the stock market highs and Trump's presidency?
The DJIA and S&P 500 reached record highs yet again today. I want to understand how direct the impact is of Trump's presidency on these ever increasing indices. Every news outlet seems to be pinning Trump as the reason for such highs. Are there other factors at play here? How much of this economic growth is really caused by Trump?
I caution against giving any president credit and blame for how the stock market behaves. Markets move for a variety of reasons including political developments and economic policy proposals. Financial news and news media in general love to point to the “reason” of events. In this case, credit for the rally is attributed to the election of President Trump. It’s worth noting that markets were hitting records before the election, even when many pundits were claiming Clinton would be the winner of the election.
Consider the way the markets performed when President Obama took office. The markets were in free fall and didn’t bottom until March of 2009. Was the decline that continued when he took office until two months later attributable to him, or were larger financial and economic forces at play? Similarly, the Dow Jones Industrial Index increased 125% during the Obama administration. Should President Obama get credit for that? My feeling is that all presidents receive far too much credit and blame for how the stock markets perform than they deserve.
For the most part, crediting or blaming presidents for stock market performance is just noise. I wrote an article called Investment Decisions And Tuning Out The Noise. It provides more examples of what investors should ignore. I hope you find it helpful.
Please note that this should not be considered investment advice and is only educational in nature. Be sure to consult your own investment, tax, or legal professional for help with your specific situation.
Best of luck!
David N. Waldrop, CFP®
The rally is directly attributable to a change of economic policy that Trump has brought to the Presidency. Please understand, I am not giving an opinion as to overall "good" vs. "bad", but when politics get involved, some people tend to ignore facts.
The Obama economic policy was that the economy needed to be controlled. Tax and regulatory policy was used to modify behavior. Agencies were given authority to regulate. The result was an inefficient, but controlled economy. Economic policy was meant to serve social interests. Think Europe.
Trump's philosophy is that by deregulating and lowering taxes, businesses will have more money to reinvest in growth, growth requires capital expenditures that create jobs. More jobs = less social expenditures for safety net programs, more tax revenue which funds more capital expenditure, which raises revenue, etc. Unregulating runs the risk that deregulation can bring about abuses that regulations were meant to prevent.
The CEO of a major regional bank said in a speech that 22% of labor costs were directly attributed to Dodd - Frank. You can't run a business with that type of compliance cost.
But to the stock market, there is only one conclusion. Less money will be directed by the government and more will remain in control of individuals and businesses. Economics 101 says this will stimulate the economy. Stocks ultimately will rise to keep up with earnings. Corporate tax cuts = more earnings = higher stock prices. Personal tax cuts = more spending= more consumer spending (which is still 68% of economy) = more corporate earnings. Less regulation = less compliance cost = more earnings.
The popular U.S. stock indices have recently hit new highs because market participants are anticipating that the Trump administration's policy stance and the Republican control of Congress will lead to lower taxes and reduced regulation which would generally be positive for U.S. companies. It is too early to gauge if the new administration is really spurring economic growth or if we simply have a strong uptick in business and consumer confidence in anticipation of economic growth.
In general, the stock market is forward looking. It will price in anticipated actions ahead of time and that is what we are seeing now. Certain plans could be implemented, yet the market could conceivably fall if it views them to be not quite what was expected.
Keep in mind that certain sectors may also be driving the overall market to new higher levels, while other sectors languish. For example, interest rates are rising which generally benefits the Financials sector because banks are able to earn higher margins on their loans. Year-to-date, the Financials sector is up almost 7%. This is an example of one underlying factor that may not necessarily be attributable to President Trump that is influencing the broader indices.
A common mistake investors make when looking at larger capitalization U.S. indices, like the DJIA and S&P 500, is to ignore the impact of global capital flows. So far in 2017, the U.S. small cap indices, such as the Russell 2000, are barely positive while these large cap indices have clearly outperformed. To some extent, this could be the result of foreign investors seeking perceived safety in blue chip U.S. stocks, especially given the recent out-performance of the U.S. dollar. Owning U.S. stocks when the U.S. dollar is rising is a double win for foreign investors. With much political uncertainty in Europe right now, deep pocketed institutional investors could be increasing their allocation to these highly liquid, large cap U.S. shares.
Joshua Hall, ChFC
Short-term stock market movements are better explained by animal spirit than by rationality. Remember before the election, when Hillary was still an odds on favorite to win, whenever Trump's poll number went up, the market went down and visa versa. I believe at the time, the marginal investors were Democrats. Marginal investors are those investors most optimistic and willing to pay the highest prices for stocks. After the election, there was a massive rotation of marginal investors, now they are republicans. They became extremely enthusiastic about stocks after a surprise win by Trump, following eight years of Democratic presidency. This enthusiasm does not need to be rational.
This kind of question comes up frequently when the market does something surprising, so we're working on a long tradition here.
The previous response gives quite a bit of weight to Trump and his stated goals. It may be true that some of this has a role, but there are so many other variables it is hard to make any reasonable attribution. As an example, the average corporate tax burden, the effective tax rate, is approximately 22%, not 35%, so any relief will be appreciated, but not as impactful as some imagine.
First, it is quite possible that after a grinding presidential campaign over 18 months (when the market flat-lined), the markets were simply relieved that it was over.
Contrary to the new presidents assertions, the economy is actually on pretty solid ground with broad income gains and growing employment.
A much less thought of but valid possibility is that interest rate hikes by the Fed are actually stimulating overall investing activity, both personal and in the economy. I know this sounds upside down, but hear me out. Throughout the extraordinary measures, the Fed and the government as a whole were sending signals that things were a bit scary and required unusual steps. Now that rates and normalizing and those extraordinary measures are starting to recede in our collective memories, people are feeling better.
While any combination of the above reasons, and probably several more, were at play here, we simply will never know. It takes years before markets fully absorb a presidents agenda and policies, and price the markets accordingly. I will also leave you with an old adage.
The president is not the market is not the economy.