President Donald Trump pays close attention to the stock market, which he views as a key barometer of the success of his administration. And this is a bad thing?
Ruchir Sharma, chief global strategist of Morgan Stanley Investment Management (and the subject of last week’s Barron’s interview), thinks it could be. Writing in the op-ed pages of Wednesday’s New York Times, he contended that Trump’s “dangerous obsession with the markets” caused him to adjust policies to keep equity prices high.
Trump likes to brag about the stock market’s performance since his election, and not without justification. According to Wilshire Associates, as of Friday, the value of the broad U.S. stock market had increased by $9.1 trillion, or 35.6%, since its close on Election Day, Nov. 8, 2016. Since Inauguration Day, Jan. 20, 2017, the Wilshire 5000 had increased by $6.9 trillion, or 26.6%.
The major averages are a chip shot away from their records, with the S&P 500 index less than 1% under its Sept. 21 high. And if dividends are included, the S&P 500 total return index made it over the top to a new high on Friday, according to Dan Wiener, who co-edits the Independent Adviser for Vanguard Investors newsletter. The Dow Jones Industrial Average, meanwhile, was within 416 points of its high-water mark, set on Oct. 3.
But the Wilshire 5000 was still 1.3% below its September high by about $450 billion, in terms of your brokerage statement. Since the market started to stumble in the fall, “Mr. Trump began making critical presidential decisions with an eye to pushing stock prices back up,” Sharma writes.
In particular, the president backed away from his threat to increase tariffs sharply on Chinese goods. Markets had feared that added levies would escalate the trade war. More recently, Trump pulled back from his threat to close the Mexican border, for fear of its impact on markets, as Sharma quotes the Axios news site.
In addition, Trump has been blasting the Federal Reserve for raising interest rates and for its “quantitative tightening” via the $50 billion per month shrinkage of its balance sheet. The nation’s chief executive also has announced his intention to nominate Stephen Moore and Herman Cain to the Fed’s Board of Governors, whose primary qualifications appear to be their political support for Trump.
Agree with these moves or not, the bottom line is a rebound of $6.2 trillion, or 24.5%, in the Wilshire 5000 from its Christmas Eve low. So that’s a bad thing?
This may sound like a reworking of General Motors President Charles Wilson’s much-misquoted assertion in 1953 about the congruent interests of his company and the country: What’s good for the DJIA is good for the USA. But if politicians take note of markets’ negative reactions to bad policies, is that a bad thing?
Instead of a destructive escalation in tariffs, U.S. and China negotiators, by most accounts, continue to make progress on a comprehensive trade deal. Although nothing is definitive, Churchill’s dictum—Better jaw-jaw than war-war—also applies to trade conflicts.
A good bit of stocks’ recovery can be attributed to hopes for an agreement. The market also should benefit more from a good deal covering substantive issues, such as intellectual property, rather than a superficial pact that meets an artificial deadline. Similarly, avoiding a closure of the border with Mexico, which would disrupt $1.6 billion of trade flows a day, is also a positive.
Consider the opposite, when past administrations pursued policies that hit corporations without regard to the impact on the stock market. In 1962, President John F. Kennedy demanded that U.S. steel makers roll back a price increase, to which the companies acceded. The S&P 500 would suffer a 29% bear market in the first half of that year, with steel stocks falling 50% from their 1960 peaks.
As for Trump’s Fed bashing, to reiterate the take of last week’s column, the president had a point last fall in saying that monetary policy had become too tight, which was evident in the slide in risk assets, as well as the deflationary signals being sent from the Treasury market and commodities. Fed Chairman Jerome Powell shifted gears in early January, to be patient about further interest-rate increases. Since then, the Fed has strongly suggested that rate hikes aren’t likely for the rest of the year, while announcing a wind-down of its portfolio shrinkage.
But Trump’s calls for Fed rate cuts and a resumption of asset purchases are out of line and certain to fall on deaf ears at the central bank. The economy continues to grow at its long-term trend rate. (The Atlanta Fed’s GDPNow estimate for the first quarter was upped to 2.3% on April 8 from 2.1%, and is in line with the fourth quarter’s 2.2%.)
Minutes of the March 19-20 meeting of the Federal Open Market Committee, released last week, show that the panel could move rates up or down, depending on economic data. But if the economy grows as the panel expects, a modest hike in the federal-funds rate could be appropriate. By Friday, the fed-funds futures had reduced the odds of a rate cut to less than even money by next January, after having generated a greater than 50% probability of a reduction a week earlier, according to the CME FedWatch site.
As for Trump’s hope of packing the Fed with his political allies, Cain’s chances seem all but dead, with four Republican senators declaring their opposition. Moore’s chances are uncertain at best. But, in any case, the markets don’t see a political takeover of the central bank as an imminent danger.
Moreover, Miller Tabak economist Paul Tabak suggests that the bond market’s reaction to Trump’s Fed picks could be to send long-term yields higher, if fixed-income investors fear that the nominees’ easy-money proclivities could lead to higher inflation.
Sharma argues that Trump’s “obsession” with stocks poses the danger that the market is driving policy. The test will be whether the U.S. exacts a “tough” trade deal with China, he says, rather than coming up with one just to placate the markets.
Policy makers also ignore market reactions at their peril. In Freudian terms, the markets may be the superego that reins in Trump’s unbridled id. In any case, I trust markets more than almost any politician.
As for the markets themselves, stocks and bonds almost seem to be living in two different worlds. Bond yields remain down for the year, a sign of economic softness, which was underlined by the International Monetary Fund’s lowering its 2019 global growth forecast to 3.3%, from previous estimates of 3.5% in January and 3.7% last October. But the price action in equities, along with currencies and commodities, suggested otherwise.
The much-discussed inverted Treasury yield curve, a recessionary portent, also has uninverted. The benchmark 10-year note’s yield last month had briefly dipped below that of the three-month bill, but since has moved back to 2.56%, from 2.37% on March 27, while the T-bill remained essentially unchanged around 2.44%. The restoration of a positively sloped yield curve has boosted shares of banks and other financials, with the exchange-traded fund (ticker: XLF) up 6.8% since the recent low in Treasury yields.
Much of the pop in yields came on Friday in reaction to news of strong credit growth in China, a further sign that Beijing is doing whatever it takes to get its economy moving. More basically, some bond pros simply saw the drop in yields as having gone too far. David Rolley, co-leader of Loomis Sayles’ global fixed-income team, said earlier in the week that the main risk is that yields could go higher, which isn’t the way he saw market players positioned.
Be that as it may, Italian 10-year bond yields have fallen below their U.S. counterparts, while
strategist Albert Edwards observes that even Greek five-year bond yields—which were over 20% at their crisis peak—have fallen below similar-maturity U.S. Treasuries. Clearly, the gravitational pull from negative-yielding bonds elsewhere in Europe and in Japan, estimated at $10.4 trillion, is being felt in these peripheral credits.
Chart watchers saw signs of strength in the price action elsewhere. The Strategas technical strategy team, led by Chris Verrone, ticked off five positive cyclical signs: higher iron-ore and steel rebar prices; consumer-discretionary stocks outperforming consumer staples; high-beta (riskier, more volatile) equities outpacing low-beta stocks; leadership among industrial and semiconductor shares; and a “quiet” improvement in automobile stocks.
Similarly, Rich Ross, Evercore ISI’s technical guru, spied a number of bullish charts, from rallies in crude oil and copper to strength in emerging markets, which typically move in tandem with commodities. Even in Europe, where the economic news has been mostly bad, he sees breakouts in charts of the German DAX and the Italian FTSE MIB in equities.
What has declined is volatility, in stocks, bonds, or currencies. Whether that’s a sign of confidence or complacency is the question. The VIX—the so-called stock market fear gauge that measures the volatility of the S&P 500—ended the week just over 12, a somnolent level well below the 20-ish readings seen in the fourth-quarter selloff and the spike over 30 at the worst of December’s decline.
derivatives team observes near-record short positions in VIX futures among speculators, which means they’re betting big that volatility will remain subdued, as it tends to in bull markets. You’ll recall that bets like those were considered sure things back in 2017—until they blew up rather spectacularly in early 2018. What could go wrong now?
Write to Randall W. Forsyth at firstname.lastname@example.org