President Donald Trump seems determined to ignore the small print disclaimer that brokers use to warn investors eying a bumper return — stocks can go down as well as up.
Trump has made the rollicking year on Wall Street a centerpiece of his political message, repeatedly taking credit for the bull run, as if he personally steered the Dow Jones industrial average through a year of smashed record highs.
“We broke it 84 times this year. The stock market hit a new high 84 times since we won the election on November 8 of last year, so that’s something we can all be proud of,” Trump told first responders at a firehouse in Florida on Wednesday.
“That makes you all look very smart and your families say, ‘Boy, are you a great investor,’ right, when you have your numbers go up and your stocks go up and everything else.”
Perhaps it’s only right that Trump gets some of the credit for a boom year that has made some investors rich. The Dow Jones industrial average is up 25% this year, ending Wednesday trading nearly 5,000 points higher than its close on the eve of Trump’s inauguration.
Certainly, expectations for Trump’s new tax reform played a strong role in exuberant investor sentiment all year. A cut of the corporate tax rate from 35% to 21% boosted the health of corporations, along with the President’s determination to free companies of regulatory burdens, and made their stock attractive.
Shaking up convention
Trump’s stock market cheerleading marks yet another way he has broken the mold of presidential behavior, given that most US leaders tend to avoid market predictions so as not to shake up currency, equity and bond markets in ways that could rebound against them.
Trump’s determination to grab a political dividend from high-rising markets is in character, given his evident desire for adulation, and to some extent reflects the paucity of his achievements elsewhere — at least until he passed the most sweeping tax bill in a generation before the holidays.
But his big talk on stocks raises questions about the wisdom of a President tying himself so closely to a booming market, given that he could multiply the blame he might shoulder in the event of a serious correction.
And while many people have retirement plans tied to the markets, millions of others do not, or lack the cash to risk on stocks — an investment that tends to disproportionately attract and reward the most wealthy Americans.
Celebrating the ballooning value of stocks seems a counter-intuitive way for him to stay connected to the “forgotten men and women” on whom he based his 2016 victory, and could even be seen as a case of irrational political exuberance.
The President, however, is loving Wall Street’s banner year.
“Will be a great year for Companies and JOBS! Stock Market is poised for another year of SUCCESS!” Trump tweeted on Monday.
In November, the President told reporters on Air Force One: “the reason our stock market is so successful is because of me,” in one of many efforts to claim credit for the market’s record run.
The Dow is outperforming other racing markets in developed nations like Germany and Japan. And the bumper performance could be said to represent a vote of confidence in the US economy, which is showing robust GDP growth and job creation.
But there are plenty of other reasons why stocks are going up that are hard to trace to Trump alone, including strong corporate performance, the strength of the global economy, low interest rates and economic confidence rooted in the recovery that unfolded on the watch of his predecessor, Barack Obama.
History tends to reward presidents in office in prosperous times and disdain those who have the misfortune of presiding over recessions. Still, given the multiple factors weighting on economic performance, presidents often get too much credit when things are good and too much blame for crashes.
New York state of mind
It’s not surprising that Trump is so fixated on the state of the stock market. He spent his entire life in New York, and as a real estate tycoon sees things through a business lens. Some of his friends are rich investors. And it’s a good bet that members of his Mar-a-Lago club in Florida, where he is spending the holidays, are thanking the President for the health of their portfolios.
So the President has every incentive to ride the market while it rises. But sooner or later, this bull market will end, perhaps because of an economic shock or global crisis over which he has little control. And if Trump is in office when it does, his triumphalist rhetoric may leave him flailing for a rationale as to why plunging stock values are not his fault.
“One of the risks of putting everything on ‘Look, the stock market loves me! It’s way up’ is that it can drop 15% or 20% very quickly — and he will say, ‘Well, it’s those people in Congress,’ or blame it on Hillary somehow,” Kenneth Rogoff, a Harvard University professor and former chief economist at the International Monetary Fund, said Monday on CNN.
Trump has said the tax bill’s passage will give another jolt of adrenaline to stocks, as corporations savor a windfall. And most analysts expect the economy — and therefore the stock market — to remain strong in the near future, so Trump may be on to a winner in midterm election year 2018.
But it is not inevitable that the extra cash investors will have to splash on stocks next year will unleash a new bull run, since markets often price in major events ahead of time. And academic research indicates that the passage of tax reform efforts does not by itself keep markets going up.
“If we continue to go up, up, up, until August of 2018, this will actually be the longest bull market since 1928,” said Monica Mehta, managing principal at Seventh Capital, a Texas-based investment firm.
“For the folks that were investing in the market in 1928, I am not sure that is the best time to stay, because we all know what happened after that,” Mehta told CNN on Tuesday, referring to the Wall Street crash the following year.
Danger of volatility
The danger of volatility is not the only reason why Trump might consider being more cautious in tying himself directly to the performance of the stock market.
The benefits of roaring equities are not equally shared, and those at the top — who have money to burn — get the biggest payoff.
“For many Americans, they are not in the stock market,” Raphael Bostic, CEO of the Federal Reserve Bank of Atlanta, told CNN’s Richard Quest earlier this month.
“So it’s a wealth effect that is really focused in a certain segment of the population, and a lot of folks are left out.”
On average, only 18.7% of US taxpayers directly own stocks — that figure does not include those who are in the market through an employer-sponsored retirement plan, according to a Pew analysis of Census Bureau data.Â
Stock ownership tends to also track income levels. Only 21% of people with an annual household income of less than $30,000 own stocks, according to a Gallup poll in May. But 89% of those who earn $100,000 a year have money in the market.
Trump’s fixation with stock market hikes, which mostly benefit the wealthy, as well as a new tax law that seems to benefit the rich may offer Democrats an opening as they seek to frame an economic message to undercut his populism.
But then again, his appeal has also often appeared to be based on tapping into the anger of his supporters rather than offering an authentic impression that he empathizes with their economic struggles.
The President appeared to have that in mind as he stressed how rising stocks could benefit the nearly half of Americans who have 401(k) plans when he spoke in the Florida fire house.
“When the stock market goes up that affects everybody … you think of the rich … but the fact is that it affects everybody because people own stocks whether it is in 401(k)s or otherwise,” he said.
It didn’t make much sense for a real estate billionaire from Manhattan to set himself up as the champion of forgotten Americans in 2016, but he pulled it off. Trump may have to be similarly dextrous if stocks defy his predictions and go into reverse before his re-election race.
