Browsing the blog archives for February, 2018.

Trumponomics and the Stock Market


President Trump has lauded strength in the stock market as evidence for his economic policy. It’s not surprising that has hasn’t comment much during the recent correction and volatility. So how much influence does he have on the market anyway?

The answer is some, but the situation is complicated. In theory, stock values mirror expected returns over the long term, adjusted for risk. In practice, they are also influenced other factors, including:

  1. The Economy: There are exceptions, but most companies expect to do better when the economy grows, so economic expectations drive stock values.
  2. Regulations: In the long run, consumers pay for regulations through higher prices. But companies also suffer, as higher costs reduce demand for their products. Less production means less profit and drives stock prices lower.
  3. Interest rates: When interest rates are low, savers (especially retirees) who would rather invest in safer instruments are often pushed into stocks to achieve a reasonable return. The Fed has kept interest rates artificially low for years, priming the stock market with investors less able to manage the risk (the bubble this creates is another concern altogether). When rates rise, these investors are likely to move money from stocks to bonds, CDs, treasury notes, and other “safer” alternatives.
  4. Emotions: When investors feel good, they tend to buy more stocks, pushing prices higher. Keynes called this “animal spirits” and although he probably overstated their long-term influence, he made a valid point.

All of these factors have promoted record highs in the stock market. President Trump’s calls for tax reform and reductions in regulations raised economic expectations before he ever took office. Interest rates also remained low during his first year as president. After 8 years of Obama stagnation, investors were itching to take money off the sidelines and put it to work.

But the Fed controls interest rates and doesn’t like much inflation. It will likely raise rates in the coming months, making non-stock investments relatively more attractive. Add to this the reality that even quality stocks can become overpriced, and the market correction we’ve seen is no surprise. Of course, determining when this will occur is not easy, but market fluctuation is normal.

As for President Trump, he can rightfully take credit for much the market’s rise. Part of the Trump effect on the market is the simple fact that Hillary Clinton did not win the election. But there are other factors involved as well. Trumponomics is far from perfect, but it’s a far cry from Obama-Clinton.