Notes from the Jungle

The Trump Train Derails

Tuesday, February 6, 2018

Most people don’t like Donald Trump. According to virtually every reputable polling agency, a majority of the country has never approved of his job performance. But there are a lot of soft Trump supporters. These people don’t like Trump, either—they voted against him, marched against him, and dream that Mueller’s investigation will remove him—but they have to admit that he’s surprised them in at least one way.

“I mean, say what you want about Trump—personally, I can’t stand him,” they’ll tell you. “But if nothing else, he’s inspired a lot of confidence in the market—confidence that you didn’t see under Obama, and you certainly wouldn’t have seen under Hillary. He’s gotten rid of the onerous regulations that have been hurting American industry, he’s reduced corporate tax rates, and thanks to him, the stock market is booming. That’s not just good for guys like you and me, but for the whole country.”

You see this kind of apologia a lot these days—at the racquet club, in the opinion sections of most legacy publications, even at Democratic Party fundraisers, once the wine has started flowing. Trump does it too—while last week’s State of the Union featured fire-and-fury provocations toward North Korea and mention of the Wall, most of the speech was focused on the past year’s economic good news.

The president’s defenders do have a point. Despite pre-election predictions that a Trump win would be an economic disaster, the finance and business community was quick to embrace the controversial billionaire after his surprise victory. In the weeks leading up to the inauguration, it was common to see bankers and CEOs in the lobby of Trump Tower. Wall Street legends like Stephen Schwarzman and Carl Icahn were eager to associate with the president-elect. And, yes, Trump’s first year in office was marked by strengthening economic growth and an exuberant stock market. By November 2017, the Dow Jones had advanced 28.50%, and the S&P 500 had advanced 21%. (And from November to the end of January, the Dow had risen another 14%.)

Until recently, market forecasts for the future were even more bullish. Scott Minerd of Guggenheim Partners predicted that the S&P 500 could hit an all-time high of 3600 points this year. USA Today asked three financial experts their stock predictions for 2018. All three—even the bear of the group—predicted at least moderate gains across the board.

But then came last Friday. After a year of rapid growth, inflation fears caused by a stronger-than-expected jobs report, and a spike in interest rates led to a sudden nosedive in stock prices. The Dow dropped 666 points in one day, the market’s worst day since Britain voted to leave the E.U. (remember when that was the craziest news imaginable?)

And the following trading day was even worse. Yesterday, the Dow dropped a further 1,100 points—the largest one-day point decline in history—and the S&P 500 went down 5%. Whether or not this slide holds, it seems clear that, at least for the moment, the Trump economy is less infallible than it once seemed.

Or is it? Even if the market does eventually return to the halcyon days of last Thursday, this correction is a good reminder that stock market performance doesn’t say very much about the economy. After all, the recent market uncertainty was caused in part by positive news. Although investors may fear some of their long-term inflationary effects, wage growth and falling unemployment are mostly good things.

Because while the stock market is a valuable tool for making money, it’s less tethered to reality than a lot of people realize. Sometimes, the market turns into a volatile echo chamber, its vagaries reflections only of what skittish investors are panicking over (and what more daring investors fear they’ll miss out on). It’s a trend that’s not unique to stocks—just look at Bitcoin.

Over the past year, most experts have pointed to “confidence” in President Trump as one of the main drivers for high stock prices. But looking at the actual data, it’s hard to figure out what exactly he’s has done to earn that trust. While the economy has certainly improved since Trump took office, most of those changes are arguably just the continuation of trends that had already begun during Barack Obama’s presidency. In November 2017, when most of the rosy statistics above were compiled, Trump had yet to sign a single concrete bill. The tax bill, his lone legislative achievement to date, seemed unlikely to make it through both houses of congress. And most of the administration’s biggest controversies had already happened. Daily reports of incompetence, infighting and Russiagate were already dark clouds over his presidency. Increased tensions with North Korea made nuclear war seem more likely than it had in decades. Even the president’s business advisory councils had already disbanded, in the wake of his incendiary comments on the violence in Charlottesville. But then the tax plan passed, and the bullishness increased even more.

But by every metric, Trump’s presidency was a failure in November, and by every metric, it continues to be one. Apart from the hope that tax cuts and some future deregulatory, laissez-faire legislation will spur further economic growth, it’s hard to say what Wall Street still sees in the president.

There’s a real chance that disillusionment with a controversial and ineffective president will drive stock prices down further over the coming year, particularly now that investors have been reminded that stocks go down as well as up. But one can’t help but wonder: if Trump was directly responsible for the stock market’s rally, if we could pinpoint an exact policy that had led to market prices increasing, would it really have mattered?

The country is more divided than ever. Although economic confidence is at an all-time high, confidence in the nation’s direction seems lower than ever. And multiple surveys from around the world attest to the decline in global perception of the United States in the past year. Anybody who thinks that fact can be papered over by a rosy economic forecast—or that the economy will continue to grow forever in that climate—is missing the forest for the trees. As the economist Herbert Stein famously said, “If something cannot go on forever, it will stop.”



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