Wall Street’s Trump bump could still have some legs

USA TODAY International Edition - - MONEY - Adam Shell

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

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