Leaders must recognize market, economy not same

Catherine Rampell

President Donald

Trump has been bragging about the stock market since he took office, attributing any upward movement to his stewardship of the economy. Curiously, with the market tumbling in recent days, he’s been a teensy bit shyer about taking credit for market performance.

So: What’s going on? And is Trump to blame?

Markets move in mysterious ways and you should be skeptical of anyone who claims they can definitively explain any particular twinge of the ticker. Still, we can point to at least a few factors that could be making traders nervous right now.

The first is that stocks have looked pricey for a while. Consider the longterm price-to-earnings ratio. That’s a measure of how much a stock costs relative to how much that company has been making in profit. That ratio is about twice as high as the average from the past century, a sign that stocks likely are overvalued.

That doesn’t explain why we had such a sharp correction mere days after Trump’s State of the Union, when he went out of his way to boast about record Wall Street highs.

A second explanation has to do with recent data.

Inflation has been unusually low for a while. But some recent reports suggest that could change. For instance, Friday’s jobs report showed U.S. wages rising at their fastest annual pace since June 2009. This is generally welcome news. But higher wages could also be the start of higher prices — that is, faster inflation.

That might lead the Federal Reserve to raise interest rates more quickly than it had suggested it would. If rates rise more quickly, that’s generally bad for stocks.

In the months leading up to the Friday and Monday sell-offs, rates on 10-year government bonds had been creeping up. Rising yields can reflect anticipation of higher inflation and could convince the Fed that it soon needs to nip such concerns in the bud.

A third, and related, factor: We just got a new Fed chair. As in, on Monday morning. And that chair’s approach to monetary policy is a bit of a mystery.

Investors knew that his predecessor, Janet Yellen, was an inflation dove, meaning she was more willing to keep interest rates low for longer. But the new chair, Jerome Powell, may be inclined to speed up rate hikes in response to the recent wage and bond yield data. Investors may feel it’s best to err on the side of assuming he’s more hawkish.

Finally, there’s fiscal policy to consider.

We’ve seen Congress and the White House decide to blow up deficits of late. That includes the $1.5 trillion, deficit-financed tax cut passed in December, as well as costly proposals for an infrastructure package, Mexican border wall, and upgrading our nuclear arsenal.

All of these measures amount to economic stimulus. But with unemployment at 4.1 percent, now is a strange time to be engaging in expansionary fiscal policy.

All that said, while presidents can influence markets, they don’t control them. The best thing Trump and lawmakers can do to reassure investors would be to show they take their policymaking responsibilities seriously and are not just trying to score short-term market spikes. And that, moreover, they recognize that the market is not the same thing as the economy.

Given the ugly numbers Monday, at least, they may have finally taken this last lesson to heart.