Give president his due on market
Why is the U.S. stock market up so much since the presidential election?
There’s no way to tell for certain. People buy and sell stocks for all kinds of reasons that they aren’t required to disclose publicly. But there is at least one plausible story, as President Trump pointed out when he tweeted earlier this month, “Stock Market at an all-time high. That doesn’t just happen!”
That story has to do with Trump’s own policies: cutting taxes and reducing regulations.
Some people who make their livings advising people about the stock market are betting on tax reductions and telling customers to buy shares in companies that might benefit from them. Goldman Sachs’ chief equity strategist, David Kostin, said on CNBC last month, “You will get some tax reform or tax cuts, and therefore companies that are currently paying high tax rates would benefit from a tax reduction. They would get positive earnings revisions as a result of that, and that would be a catalyst for those companies.”
In other words, a share of stock is a purchase of an interest in the future profits of a company. Lower corporate tax rates mean more profits flow to shareholders rather than to the IRS.
Other corporate executives are emphasizing the regulatory side of the equation.
In an earnings call with stock analysts, Nick Akins, CEO of American Electric Power Co., said, “We have a new presidential administration with a pro-growth agenda.” He mentioned “reduction of regulatory burdens” for permits as one of several “Trump initiatives that make us optimistic concerning the future” of the company. If a power company can build a new plant faster because of less bureaucratic hassle, then it can make more money, and its stock is worth more.
For businesses, regulatory costs are real and substantial — millions and millions of dollars in legal fees to keep up to date with ever-changing rules. JPMorgan Chase CEO Jamie Dimon has described his bank’s efforts to comply with the Dodd-Frank legislation signed into law by President Barack Obama as involving 3,000 full-time staff members “at a cost of close to $3 billion.”
Increasingly, American ingenuity is devoted as much to compliance as to more productive activities. A recent New York Times feature on a financial technology innovation lab highlighted one startup that “uses artificial intelligence to spot compliance and reputational risks for banks in routine employee emails” and another that “turns compliance training into a game experience for employees.”
But there’s another narrative about Trump and the bull market.
For starters, President Trump hasn’t actually done that much yet. He hasn’t enacted tax reform or tax reductions, and he and the Republican Congress haven’t repealed Dodd-Frank.
He has, however, frozen or withdrawn 860 pending regulations. And stock prices reflect assessments of what will happen in the future. Before election day, prices reflected, to some degree, an expectation of an incoming Clinton administration that wouldn’t just preserve existing Obama tax rates and regulations, but that would raise taxes even more and pile yet more onerous rules on American businesses.
To succeed, Trump doesn’t have to undo all of Obama’s mistakes. He merely needs to avoid inflicting additional damage.
Trump, some will say, should win no praise by claiming credit for the soaring stock prices, when that honor rightfully belongs to the hardworking managers and employees of the businesses whose shares are soaring. Trump’s “that doesn’t just happen” tweet risks coming off as a Republican version of President Barack Obama’s 2012 “if you’ve got a business — you didn’t build that,” comment. It is a way for a politician to claim credit for someone else’s accomplishment.
The test will be when the market eventually falls, as it inevitably will. (All three major equity indicators — the Dow Jones industrial average, the S&P 500 index and the Nasdaq composite index — have been down since Tuesday as investors worry over rising tensions between the U.S. and North Korea.) Then there will be an alternative story that blames sagging stock prices on Trump’s threatened tariffs and immigration restrictions or on his failure to accomplish legislative goals.
If one is going to attribute stock market fluctuations to presidential leadership, consistency requires holding Trump and his successors and predecessors equally accountable, regardless of whether the market arrows are the downward-pointing red ones or the upward-pointing green ones.
Since election day, the arrows have been mostly up, in a way that has created, at least on paper, trillions of dollars of additional wealth for investors. If things had gone in the other direction, then plenty of people would be blaming the president for losses. Whatever one thinks of Trump, it seems stingy to deny him at least some credit for the gains.