This week the “Trump Rally” continued as the Dow Jones Industrial Average crossed 20,000, and our president issued a celebratory tweet. How much does this mean? To what extent is it a vindication of the economic policy approaches pursued by the new Administration? Will the post-election rally continue? No one knows these answers, and market timing is a fool’s game, but I remain persuaded that markets and the economy are most likely enjoying a sugar-high that will not last a year.
First, Dow 20,000 is a meaningless benchmark and crossing it means little. Its numerology, not analysis, to focus on round numbers. The Dow is an odd and arbitrary index which weights companies by their share price not their market value. It is highly limited in who is included, with Goldman Sachs accounting for over 20 percent of the gain in the 30 stock index since Election Day.
Second, as then Treasury secretary Bob Rubin constantly reminded his colleagues in the Clinton administration, “markets go up, markets go down” and it is a mistake to judge policy on immediate market reactions rather than concentrating on fundamentals. The observation that the best post-election pre-inauguration performance of the stock market in the last 100 years occurred during Herbert Hoover’s transition underscores this point as does the market’s poor performance during the Roosevelt and Obama transitions.
Third, there are indicators in markets of possible trouble ahead. While financial stocks have been very strong over the last several months, insider sales have soared.
Despite what most observers see as highly uncertain environment, market expectations of near term volatility are near record lows suggesting scope for sudden disillusionment. Rapid inflows into mutual funds could easily go into reverse.
Fourth, the fundamental basis for a big market rally is very unclear. If “pro-business policies” were, key over time it would not be the case that Democratic administrations have consistently seen stronger markets than Republican ones over the last 70 years. Recall also that nearly half of S&P 500 revenue is earned abroad and will not be enhanced by new U.S. domestic policies but may be hurt by new nationalist measures. It is far from clear that corporate tax reform on the scale envisioned by the new administration will pass this year and even the hallmark 1986 Act tax reform act had only modest stock market impacts. The impact of regulatory changes will be felt only in some sectors and may be offset by new populist measures such as restrictions on pharmaceutical pricing.
Fifth, and most important, new governments with authoritarian tendencies have historically brought about bull markets even before they led to disaster. Governments with much stronger authoritarian tendencies than anything plausible in the U.S. — like those of Hitler or Mussolini — nonetheless saw strong markets in their early years.
I am not sure which is more difficult: predicting what Trump will do next or timing the market. Either way after the events of the last week, it is much easier to imagine downside than upside scenarios.