Trump and Dow 25000
The Dow Jones Industrial Average leapt above 25000 for the first time on Thursday, and naturally the White House sent out a press release taking credit. President Trump’s pro-growth policies are partly responsible for the market’s extraordinary bull run, but he is still making a mistake to hang his economic credentials on stock prices.
As Mr. Trump likes to say, equity prices have climbed nearly 40% since Election Day in 2016. Investors have stayed bullish as growth has increased around the world, inflation has remained contained despite accommodating central bank policy, and the Trump deregulatory and tax agenda has taken shape.
The cut in corporate tax rates will increase earnings, which will flow into equity values in addition to higher wages. The market’s run since the tax bill passed may also reflect that many investors doubted it would pass, or that they doubted the final version would have the pro-growth qualities that economist Robert Barro describes nearby. In that sense Dow 25000 is a harbinger of faster growth.
Yet it still makes no sense for a President, especially one in his first year, to tee up stocks as a measure of economic success. As Wall Street legend Ace Greenberg famously put it amid the 1987 market crash, “stocks fluctuate, next question.” The current lengthy period without a major correction is highly unusual—and it won’t last. When prices fall after Mr. Trump’s many boasts about their rise, the press corps will ask him to explain the correction at every opportunity. Presidents do not want to become stock-market analysts.
All the more so because no one knows how the unwinding of the Federal Reserve’s unprecedented balance sheet will affect stock and other asset prices. The Fed’s bond-buying was explicitly intended to buoy asset prices including stocks, and it did. But will asset prices be under greater pressure as the Fed begins to move in reverse with more dispatch this year? Somehow we don’t see Mr. Trump offering an extended financial analysis of the asset-price impact of quantitative easing.
Mr. Trump can certainly tout the benefits of faster economic growth. Those will be manifest in ways that affect all Americans—more jobs and job mobility, higher wages—not only those who own stocks or have 401(k)s. Stock prices will take care of themselves.