It may be a bit of an oversimplification, but not by much. The stock market runs on the future anticipation of profits across a broad range of companies and industries. That is why the record bull market began immediately after President Trump was elected. It was on the ANTICIPATION of tax relief and deregulation that the market moved.
The historic slow recovery of the Obama administrations – and the strong indications of a slowing down of even that slow recovery in Obama’s last months in office – was based on policies that retarded business growth, job creation and wage increases.
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Political policies do impact on the stock market, but not always as the politicians might like or ever claim. You can recall the almost universal campaign claims that a Trump election would crash the market. Those were not intelligent economic assessments, but merely campaign fear mongering in an effort to scare votes away from Trump. As such, those predictions were woefully wrong.
So, what has driven down the market?
In the Democrat version, it has been the dubious claims of chaos and disruption as a result of the Trump presidency. This is again a political claim that has very little validity in the real world. It is true that markets tend to like clarity, consistency and predictability. Who doesn’t? But what markets love even more than those conditions is profit – pure and simple. At this juncture, profits are looking pretty good.
Where presidential policy can be said to have a negative impact – a cut into profits – are the tariffs. This fear is mitigated to some extent by the understanding that Trump is basically a free-trader and is surgically using temporary tariffs to roll back what every knowledgeable person understands to be trade practices detrimental to the United State – including tariffs imposed by other nations, cyber theft of business research and development and lack of protection of American intellectual property – and these problems go well beyond just China.
Because the recognized purpose of the tariffs was to eliminate much of them – and protect the technological developments of American corporations — the tariff talk, and even the initial imposition of tariffs, did not impact significantly on the market.
As is always the case, there have been a number of factors that can explain the downward turn.
There is the long-range analysis that shows a historic 10-year trend into recessions. We are at that point today. There are a lot of theories why that seems to be the case, but even then, there must be underlying factors that impact on profits.
The strongest correlation between policy action and drops in stock prices is interest rate increases by the Federal Reserve Bank – and even anticipation of increases in the near future. While the Obama recovery was weak and feeble, had the Fed, as they call it, increased interest rates, the economy would likely have fallen back into serious recession. Everyone understood that interest rates would eventually have to be raised to fend-off inflation – and that any such increase would drive down stock prices.
That is why Trump is jaw-boning the Fed in an effort to have them further delay interest rate increases. However, he has no power to stop them. The Fed – for better or worse – was created as an independent quasi-governmental agency beyond the authority of a President. Presidents nominate the heads of the Fed, but they cannot summarily remove them.
Another factor that is contributing to the slide is the record rise in the past two years. There is a time when investors – speaking of the big funds and major players – do a little of what is called “profit taking.” Any smart casino gambler – and buying stocks is a gamble – will scoop up the wins and walk from the table in the wise belief that you cannot continue to win consistently. This was a market ready for a little profit taking.
Another factor shows that even good news can have untoward consequences. In economic terms, the 3.7 percent unemployment rate – which economists see as full employment – means that workers will be harder to find – and more expensive, meaning wage increases. That cuts into profits – the gold standard of Wall Street.
Democrats and the left-wing media – including the highly politically biased economic analysts – avoid one of the more significant factors driving prices down. If they mention it at all, they claim it is not a factor because it does not comport with a pervasive anti-Trump/pro-Democrat reporting narrative. It is the control of the United States House of Representatives by the Democrats – and the increased inability of Washington to continue to produce pro-business (profit-increasing) policies.
There has been a very close correlation between the political polls and the stock market. As the probability of a Democrat takeover in the House increased, stocks declined. The decline accelerated on the ANTICIPATION of Republicans losing control of the House became more obvious. The precipitous drop further accelerated immediately following the election in which they took a clear majority in the House and set Nancy Pelosi on track to become Speaker again.
This, combined with Democrats retaining the ability to block legislation and mount filibusters in the Senate, renders the congressional GOP in such a weak position that it will be virtually impossible for them to advance any significant conservative pro-business proposals to the President’s desk. Conversely, Democrats will be blocked by the GOP Senate and Trump’s veto pen in advancing any portion of their left-wing agenda.
This means gridlock and virtually totally politicization of the process as Democrats mount a series of investigations to destroy the Trump presidency in the hope of taking over the Senate and White House in 2020 – and even removing Trump in the interim.
If chaos is negatively affecting the market, pick your villain. Democrats will point to the unconventional style and pugnacious personality of the President and Republicans will cite the threat of all those politically motivated investigations and the unrelenting attacks on all things Trump. Laying the blame is as difficult and meaningless as arguing over who started a barroom fight.
What can be said is that all evidence suggests that – like it or not – the stock market is very partial to Republican pro-business policies.
So, there ‘tis.