Trump and the U.S. Stock Market

December 24, 2018

Earlier in his presidency, Donald Trump would frequently cite rising U.S. share prices as a vote of confidence in his leadership and economic policies. However, less than two years into his term, the Nasdaq and S&P 500 have entered bear market territory, and the Dow Jones Industrials, with a 19.1% slide from peak, is knocking on that door. Bear markets occur when a peak to trough move is 20.0% or greater. The Nasdaq is down 23.1% and the S&P has fallen 20.1% from their last cyclical highs early this quarter.

Many historical bear markets have far exceeded the 20% threshold. In fact, breaking the 20% threshold oftentimes becomes a fresh psychological stimulant of selling pressure. The DOW plunged 89% in the Great Depression, 45% during the Watergate era, 36% in a mere 55 days between August 25 and October 19 of 1987, and over 50% in the 21st century’s two prior bear markets, occurring in 200o-02 in association with the dot-com bursting bubble and the 9-11 attacks and then again 2007-09 during the Great Recession.

Although the DOW is still clinging to a net 9.9% advance since Trump’s inauguration on January 20, 2017, only one of his four predecessors steered a worse performance in comparable time periods. By Christmas 2010, the DOW was on balance 45.6% above its level when Obama took office on January 20, 2009. Under the stewardship of George Herbert Walker Bush and Bill Clinton, the DOW had climbed 17.3% and 18.2% by Christmas of their second years. Only in the case of George W. Bush when the U.S. economy experienced an early recession despite big tax cuts, did the DOW do worse (a drop of 20.2% by the second Christmas) than it has in the Trump Presidency.

There’s a lot of correlation among different countries’ stock market performances, but the U.S. market lately in contrast to many times in the past has underperformed others. Just this month, the Dow has slipped 14.7% so far, whereas the comparable slides of the British, German and Japanese stock markets in December have been 4.2%, 5.5%, and 9.8%. That seems counter-intuitive in light of the relatively more robust rate of U.S. economic growth, continuing low but near-target U.S. inflation, and low fixed income bond yields. Many people would agree that the weak link among potential factors that determine the performance of U.S. equities is the multi-dimensional flow of uncertainty coming out of the White House, whether it be foreign policy, fiscal policy, immigration policy, or relationships between the president and the judiciary, press, intelligence agencies, central bank, or even the president’s own advisers. Rarely if ever has a U.S. bear market been so caused by the behavior of the president.

As a candidate for president, Donald Trump was unsuccessfully depicted by various opponents as a con man even as he captured the imagination of many voters with the ingenious marketing slogan, “make America Great again.” It seems the greatest con of all was put on the American people, and from the nation’s high pinnacle as leader of the free world both militarily, diplomatically, and economically, there exists an awfully long distance for it to fall potentially. This could pose an eventual risk to dollar hegemony, and only then will people appreciate what an enormous benefit that post-WW2 role has been.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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