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As Donald Trump heads off for a two-week vacation at his golf club in Bedminster, New Jersey (not to be confused with his other 20-odd golf excursions since his inauguration, according to Politifact), it is worth noting how few of his many campaign promises he has actually accomplished in office. Trump, among other things, has not drained the swamp; or signed a health-care bill; or signed an immigration-reform bill. He has not revamped the tax code. He has not signed, or proposed, an infrastructure bill. Despite having control of both chambers of Congress, the executive branch has proven itself to be incapable of executing. If he had a board of directors, Trump would have been fired long ago.
Trump enthusiasts, for their part, point to two pivotal accomplishments since January 20. One is the confirmation of the conservative Neil Gorsuch as the 113th justice to the Supreme Court. (No need here to reiterate that Gorsuch’s seat really belongs to Merrick Garland, whose appointment was blocked by the heinous maneuvering of Senate Republicans, led by the Machiavellian tactics of Mitch McConnell, during Barack Obama’s final year as president.) Gorsuch is only 49 years old, which means that he is going to be around for a long time. Who knows how it’ll all play out in the years to come, but his vote will likely mean a repeal of many of the rights and privileges most Americans have come to take for granted. Give Trump credit: he got Gorsuch appointed, even though we will ultimately be lamenting it.
Trump’s other (and far more trumpeted) accomplishment has come to be known as the Trump Bump, which is code for the stock market’s inexorable rise since he unexpectedly won the election last November. Since market futures for the Dow Jones Industrial Average that night were heading toward a 1,000-point drop, the D.J.I.A. has been on a tear, reaching one new high after another. The D.J.I.A. is up around 20 percent since Election Day. With few other accomplishments to boast about, Trump is more than happy to take credit for the market’s rise. On August 3, he tweeted: “Business is looking better than ever with business enthusiasm at record levels. Stock Market at an all-time high. That doesn’t just happen!”
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True, it doesn’t just happen. But Trump would be wrong to claim sole responsibility for the bounce, as he seems to delight in doing. There are many factors that explain the current bull market in stocks, which started in March 2009, when the D.J.I.A. hit a low of 6,500 in the wake of the worst of the 2008 financial crisis. He won’t do it, of course, but Trump should be thanking Obama and the Federal Reserve, whose policies—re-equitizing the Wall Street banks, buying up trillions of dollars of toxic assets from the banks’ balance sheets, and keeping interest rates at unnaturally low levels—collaboratively resulted in the Dow’s rise to around 18,000 in the year before Obama left office. That’s a nearly three-fold increase. The Fed’s balance sheet has expanded to some $4.5 trillion, up from some $800 billion before the crisis. While ignoring a near tripling of the stock market under Obama, Trump is crowing about the 20 percent rise that has occurred in the D.J.I.A. since his election.
The real story behind the rise in the stock market is, as you might imagine, more complicated than Trump might be suggesting. During his tenure as chair of the Federal Reserve, Ben Bernanke created so much artificial demand for bonds that he drove up the price of bonds while pushing yields down (the yield on bonds moves inversely to their price). The effect of Bernanke’s gamble was to lower short-term interest to as close to zero as they have ever historically been. The so-called Zero-Interest-Rate Policy, or Z.I.R.P., has left investors with little choice but to invest in the stock market since investing in high-priced bonds has become a sucker’s trade.
With so much capital flowing into the stock market in search of higher returns than high-priced bonds can offer, it is no mystery why the stock market increased during the eight years of Obama’s tenure. On a risk-adjusted basis, there was no better place to invest than in the U.S. equities markets. That trend has continued under Trump. Although the Fed has stopped buying bonds—and it is slowly trying to shrink its balance sheet—both short-term and long-term interest rates still remain at historically low levels. With bonds too risky, investors have little choice but to invest in stocks.
The gains that have occurred since Trump’s election reflect not only the Fed’s Z.I.R.P. policies, but also Trump’s campaign promises. His assurances about tax cuts, repatriating corporate profits, and deregulating Wall Street, among others, have enchanted Wall Street traders and equity investors. The rise in the Dow from around 17,500 to 22,000 in the past nine months reflects their uncritical bet that Trump will be able to actually accomplish what he pledged to do. But, for unfathomable reasons, the market seems to be ignoring the fact that Trump cannot get anything done, despite the Republican Party’s control of both chambers of Congress.
But Wall Street investors—those in the business of making money from money, picking winners, and hedging risk,—aren’t going to stick with Trump forever. His inability to execute is discouraging. Investors are bound to lose faith in him. Combined with the fact that Congress doesn’t like the guy, and Capitol Hill Republicans appear increasingly unafraid that a dimwitted tweet might get them primaried, the truth is that Trump is going to have a very hard time enacting any of his economic promises into laws that he can sign. And when the market figures that out—which shouldn’t be too long from now—we are in for a huge correction, just in time for autumn, when for whatever reason, the market likes to get skittish.
That’s likely to happen even before Robert Mueller gets indictments out of a grand jury or North Korea launches another round of intercontinental ballistic missiles. And it will mean that Trump, who fancies himself as a masterful businessman, will have to explain the stock market’s slide in peripatetic 140-character bursts just as the rest of his political world closes in on him. Even Trump, given all his bluster about marketing and optics, should be smart enough to know that the stock market has only one direction to go now that it’s cracked 22,000—and that’s down.