Stocks did not crash this morning
By Scott Sumner
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.