Scott Sumner  

Stocks did not crash this morning

PRINT
Best Two Paragraphs of My Week... Two Intuitionist Insights...

The day after Trump won an unexpected election victory, stocks on Wall Street rose modestly. This surprised many people, as previously stocks had done poorly on indications that Trump was doing well in the polls. Some attributed this to "second thoughts", as investors realized that with the GOP (unexpectedly) holding the Senate, Trump would be able to enact a pro-business agenda of tax cuts and deregulation. Some pointed to post election statements by Trump associates that he would not be looking to start trade wars.

Then stocks kept rising, and as of today they are nearly 8% above post election levels. People began to refer to the "Trump trade", the idea that the stock market rally was caused by Trump. But exactly how? Stocks move on new information, and it's not clear to me what sort of new information came on the scene during the weeks and months after the election.

But let's say I'm wrong, and that 8% surge in stock prices was due to growing confidence that Trump would be able to enact his pro-business policies. Here's my question for people who hold that view:

1. What specific factors caused this growing confidence?

2. Does anyone seriously believe that after Trump's health care reform crashed and burned on Friday, investors are much more confident of his ability to get stuff through Congress than in the heady days of enthusiasm right after the election? More confident? Seriously?

3. Many foreign stock markets have also rallied significantly, including Japan and China. Were those rallies also caused by Trump?

Please don't tell me that the recent rejection of health care reform, which would have included a 3.8% cut in taxes on investment income, is just a temporary setback and that the program will eventually be enacted. That claim has absolutely no bearing on this post. The post is not about what will eventually happen, it's about whether investors now have much more reason to be confident about Trump's governing skills than they did on November 9th. Stocks move on new information.

Over the past 4 1/2 months Trump has loomed very large in the minds of the public, both supporters and critics. But don't make the mistake of assuming that the stock market is obsessed with personalities in the way that you are. Don't assume that just because you overestimate the importance of individuals in shaping history, the stock market also makes that mistake. Don't anthropomorphize the market; it's not "the Trump market."

If growing confidence in Trump's ability to enact reforms had caused the stock price rally over the past 4 1/2 months, then stocks would have crashed this morning. Instead they fell slightly. Presidents simply are not that important for stock prices. (That doesn't rule out their importance in other areas, such as foreign policy, but even there I think they are overrated.)

Here is the S&P500, which rose just over 1% the day after the election, and has added almost another 8% since then.

Screen Shot 2017-03-27 at 11.35.07 AM.png




COMMENTS (17 to date)
Thomas writes:

It's possible that stocks rose in Japan and China because of expectations of more trade with the U.S. under a Trump-resurgent economy. What about Trump's protectionism? It seems unlikely that Congress will cooperate, and the Japanese and Chinese know it.

So, why didn't stocks crash this morning, despite the failure of the GOP health-care bill? You set up a straw man: "If growing confidence in Trump's ability to enact reforms had caused the stock price rally over the past 4 1/2 months, then stocks would have crashed this morning." Why would they have crashed, instead of falling slightly (as you note)? One apparent failure -- which may yet be reversed -- doesn't undermine Trump's generally pro-business agenda.

Which isn't to say that disillusion won't set in at some point. Or that the post-election rally doesn't have complementary causes. But you seem to be stretching to deny the importance of regime change to the prospects for economic growth.

Scott Sumner writes:

Thomas, You said:

"One apparent failure -- which may yet be reversed -- doesn't undermine Trump's generally pro-business agenda."

I didn't say it did, and I think you missed the entire point of the post.

Here's what I said:

"Please don't tell me that the recent rejection of health care reform, which would have included a 3.8% cut in taxes on investment income, is just a temporary setback and that the program will eventually be enacted. That claim has absolutely no bearing on this post. The post is not about what will eventually happen, it's about whether investors now have much more reason to be confident about Trump's governing skills than they did on November 9th. Stocks move on new information."

Thus your claim that this setback might later be reversed has no bearing on my argument.

Scott Sumner writes:

I would add that trade with the US is only a small share of Chinese and Japanese GDP, so that channel cannot explain their stock market rally, even if you accept the dubious claim that Trump's policies will be good for Asian exporters.

TMC writes:

This wasn't Trump's healthcare reform, it was Ryan's. Trump forced a vote to get this off the radar, showing he's willing to deal with the Republican party as harshly as the Democrats.

I do agree the market hasn't been all about Trump. The rise was expectation of Trump's pro-market stance, the end of the Obama administration, and surprise lack of the Clinton administration. You cannot underestimate the value of those last two.

ZC writes:

Will Rogers famously wrote:
The Papers say "Congress is deadlocked and can't act." I think that is the greatest blessing that could befall this country.

Businesses and markets like the status quo, because at least they know the rules. The 'Trump rally' could well be chalked up to an expectation that the incoming administration would be unlikely to increase regulations. Last weeks health bill failure showed that this Congress and White House are likely going to be able to 'accomplish' anything of substance, so the current rules of the game are likely to stay as they are, which increases confidence in making longer-term economic decisions as the rules of the game are less likely to change.

EB writes:

No. Stocks move on inferences from new information.

ZC writes:

Will Rogers famously wrote:
The Papers say "Congress is deadlocked and can't act." I think that is the greatest blessing that could befall this country.

Businesses and markets like the status quo, because at least they know the rules. The 'Trump rally' could well be chalked up to an expectation that the incoming administration would be unlikely to increase regulations. Last weeks health bill failure showed that this Congress and White House are likely going to be able to 'accomplish' anything of substance, so the current rules of the game are likely to stay as they are, which increases confidence in making longer-term economic decisions as the rules of the game are less likely to change.

MarkLB writes:

Scott,

Thanks for your posts and posting. I have enjoyed your analysis for many years. Here are some ideas in response to your question below, that I think might explain added market confidence to the US and globally.

I do not think Friday's stoppage of healthcare significantly changed these ideas. Maybe confidence in Trump to get 100 items done was 85%, and now there is less confidence, but he may get 85 things done with 75% confidence. Will Trump quit trying with this setback? Will he crumble and stop? His recovery from numerous failures in life before and during his campaign would indicate not.

1. What specific factors caused this growing confidence? (with Trump election)

US Energy supply Increases => leading to/maintaining lower oil, natural gas, coal prices in US and Globally

Contrast the Obama Anti-postitons on fracking, drilling, exploration, coal, piplelines and using EPA, and other Govt regulation to stiffle many aspects of fossil fuel supply. Trump is pro/supportive to eliminate many these barriers, both within the Executive branch, and with Congress voiding recent regulations.

How does increased energy supply and lower US and global energy prices impact the US and and global economy? More favorable for US industry expensive truck and SUV sales, more chemical manufacturing with reduced costs, cheaper electricity for many industries, and lower transportation costs, to name a few. Lower global energy costs alone are a huge plus for China, and Japan as well.

Lower energy prices heavily impact and restrict money to aggressive/ terror sponsoring nations like Russia, Iran, Middle East countries and excess funds to militarize. I am concerned in general, that many of those countries may be highly inclined to create a "war" driving supply fears and increased energy prices. Still, lower energy prices are a huge plus for people in the US and around the world.

Many other Executive Branch regulations, including recent ones, can severely restrict the economy, that Trump will attempt to undo. How about spectrum auctioning? How abut allowing/leasing more federal land? What of Sarbanes/Oxley & Dodd/Frank & Consumer Protection Bureau rollbacks, by Executive and Congressional progress? Many indications are that Trump will work hard to reduce government roadblocks to business, with Executive power and Congressional support when he can achieve it. If Trump actually significantly reduces Federal employment and contracted employment, do those people work more productively elsewhere in the economy? What abut putting working age single men on "disability" and food stamps to work? With improved business and consumer confidence, how many of 94M not working may start again? What of retirees that can easily find some extra work for 10-20 hrs per week, and decide to do so, at the margin? When unemployment was extended to 99 weeks, many stayed "looking" for work. When that was revoked, suddenly unemployed people found work, even if part time and less than ideal.

Most Economists agree the minimum wage reduces jobs long term. What is the similar type impact from Obamacare?
Obamacare has created huge regulations reducing employment and business growth. Some examples are companies that stay under 50 employees, extra part time workers that work fewer than 30 hrs per week, and rapidly increasing business healthcare costs that employees and employers dislike. I have 2 plus extra tax forms from my employer to file my taxes this year.

After Friday's Republican failure, will Obamacare continue or collapse anyway? Insurers were being propped up with Executive decisions to refund them, and the Obamacare insurers are dropping out with increasing costs. Without a new bill, can it continue at all, see Megan McArdle's latest? Major change is almost inevitable regardless of last Friday. So has that likelihood changed?

In summary, my naive read is that while Trump has many character flaws and lots of protectionist plans, he also has many things he can do to dramatically & rapidly improve the economy. The stock market continually evaluates the latest news and information with people betting $$ in the market that it will be better than before the election. Yet, even the markets can be wrong, aka Brexit and Trump.

Phil writes:

It is quite possible the market never thought Trump and Ryan could pull off healthcare reform. They never had a serious majority, even among Republicans.

Scott Sumner writes:

Everyone, I think people missed the whole point of the post, I'd encourage you to read it again.

TMC, You said:

"The rise was expectation of Trump's pro-market stance, the end of the Obama administration, and surprise lack of the Clinton administration. You cannot underestimate the value of those last two."

I doubt there are many investors were were not fully aware of the election results by November 9th.

ZC, That doesn't explain why stocks rose after November 9th.

MarkLB, You said:

"I do not think Friday's stoppage of healthcare significantly changed these ideas. Maybe confidence in Trump to get 100 items done was 85%, and now there is less confidence, but he may get 85 things done with 75% confidence. Will Trump quit trying with this setback? Will he crumble and stop? His recovery from numerous failures in life before and during his campaign would indicate not."

So are you saying Trump's polices are bad for stock prices? Because that's the implication of your argument. You are saying the market is less convinced that he will be successful, but stocks are up 8% from Nov. 9th.

LK Beland writes:

Good question. It seems that stocks most likely to benefit from corporate tax cuts are no longer feeling the "Trump/GOP" premium (see the link below, especially the last chart).


https://ftalphaville.ft.com/2017/03/27/2186471/snap-av-your-week-in-weakening-usd/

https://pbs.twimg.com/media/C77PhCDV4AARpGI.jpg

Dan Culley writes:

Perhaps what markets really want is for the government to do mostly nothing. Seeing that Trump is quite amateurish, that led to a jump after the election. Subsequent actions have demonstrated a lack of efficacy that each time is beyond belief. The health care reform was a mess, and so jubilance that it failed.

I'm still betting the biggest gain was a break from the path of continued Obama regulatory encroachment, without real cost benefit analysis.

MarkLB writes:

Hi Scott,

Your second statement and question rhetorically asks if investors are much more confident of his ability to get stuff through Congress? No, but who said Friday's failure increased confidence?

My original comment discussed ways I thought specific factors may have caused growing confidence gradually since the election. I've added more comments below in a similar vein.

Your third question was how Trump might have caused foreign stock market rallies? I talked about lower global energy prices impacting Japan and China positively. Reducing oil prices thereby reducing excess cash to aggressive nations like Russia iand Iran to wage war and terrorism. A more rapidly growing US economy, can also help globally, and thereby raise foreign stock market expectations .

My read of the market since the election, is that it has slowly risen as it has gained confidence and clarity on some of the positive things it "expects" Trump to implement that likely will spur economic growth. Many of his personnel appointments have strongly reinforced these ideas increasing market confidence and clarity. His meetings brought together many groups of companies, and he has shown his willingness to work with and for them, in reigning in government regulation, and improving reducing corporate tax burden. His goal is to create more jobs and grow the economy. Consumer confidence has steadily increased. Companies seem to be increasing investments and hiring. Looking at the market since Friday, the failed healthcare vote did not much change any of that. But, with humility, who really knows what markets "think?:)". Not me.

Maximum Liberty writes:

I think it is the difference in the anticipated continuing growth of regulation under a President Clinton compared to apparently little growth of regulation under President Trump.

MarkLB writes:

Most negative news holds the headlines, but see the stories below.

From Market watch today, highest in 16 years:

The Conference Board said its consumer confidence index leapt to 125.6 in March from 116.1 in February, coming in well ahead of the MarketWatch-compiled consensus of 114.1.

See this Washington Post Story for a wide view of positive activity driving clarity and confidence.
The Daily 202: How Trump’s presidency is succeeding

Imagine if most of the press weren't trying to destroy Trump presidency? The press chooses what stories to ignore or put on page 12, as much as what stories to highlight to create the narrative they prefer.

Michael Rulle writes:

I am not sure what you are getting at.

I don't think it is very easy to determine why the market has moved up or down X% over such a short period of time as 4 months.If there was a "Trump rally", it is hard to argue it lasted very long. Maybe a few days or so. We have had a 7 year "Obama rally" whose policies were almost the opposite of Trumps. Markets are volatile and the standard error of the mean return over such short periods (like 4 months) are very hard to distinguish from noise. I do believe over the long run (maybe 5-15 year rolling periods) earnings drive prices. Whatever drove the "Obama Rally" probably drove the "Trump Rally". Which means I do not know. It is possible some "Momentum" trading helped push the market some, but I doubt it.

It is hard enough to figure out why the "Bush Crash" of 58% happened, let alone why an 8% gain happened.

The Original CC writes:

Don't anthropomorphize the market; it hates when you do that.

Comments for this entry have been closed
Return to top