Wall Street’s Trump bump could still have some legs
Before the recent market swoon, President Trump gushed about the record-setting rise in stock prices following his election, claiming it as proof that his economic policies were working. But coming off the worst week for the Dow Jones industrial average since early 2016, the so-called Trump bump has hit its first major bump in the road.
Last week, the president weighed in on the recent tumult that has sparked the first 10%-plus dive in stock prices in two years, despite an economy and corporate earnings that are on the upswing due, in part, to tax cuts and business deregulation he has pushed through since taking office.
In a recent tweet, Trump basically said Wall Street has it all wrong: “In the ‘old days,’ when good news was reported, the Stock Market would go up. Today, when good news is reported, the Stock Market goes down. Big mistake, and we have so much good (great) news about the economy!”
The Dow in the past four trading sessions seemed to prove Trump right, rallying 1,033 points in that stretch.
Recent turbulence raises the question of whether the stock rally that kicked off on Election Day in 2016, and which was gaining speed up until two
weeks ago, is in jeopardy.
Question: Have gains since Election Day been erased by the sell-off?
Answer: The correction has chiseled away at the big gains, but it’s nowhere near a complete wipeout. While the Dow average is 6.5% below its Jan. 26 record high, it’s still up nearly 36% since Trump was voted into office. That means someone who invested $10,000 on Election Day would now have an account balance of $13,600. The Dow would be well into bear territory, and have to fall 31.1% from its record close, to get back to where it was Nov. 8, 2016.
Q: Is Trump correct in saying that stocks should go up because the economy is in good shape?
A: Yes and, um, no. Many pros agree with the president, noting strong underlying business conditions should remain strong thanks to less regulation, tax cuts and robust government spending. The catch is that too much of a good thing for the economy can be bad news for stocks, which are priced on current conditions, says Bruce Bittles, chief investment strategist at Baird. How’s that? If the economy becomes overheated, it could prompt the Federal Reserve to raise interest rates more aggressively. The Fed’s benchmark short-term rate currently is pegged at 1.25% to 1.5% after being near 0% since the financial crisis.
Q: What’s the biggest risk facing stocks right now?
A: Anxiety over the bond market. One worry is that the economy could overheat and worker wages and other types of inflation could spike because of the stimulus from tax cuts and government spending. That scenario would cause interest rates to rise faster than forecast. Higher borrowing costs will slow the economy and make credit more expensive for businesses and consumers. The second risk is if yields rise enough, they will make bonds a more competitive investment option. Investors might be attracted to a 3% yield on the 10-year Treasury note and take money out of the market and put it into bonds. The yield on the 10-year U.S. bond climbed to 2.92% Wednesday, a four-year high.
Despite recent turbulence, the Dow is up nearly 36% since President Trump was voted into office. RICHARD DREW/AP