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On Nov. 9, 2016, economist Paul Krugman wrote in the New York Times: “It really does now look like President Donald J. Trump, and markets are plunging. . . . If the question is when markets might recover, a first-pass answer is never.” Krugman’s gloomy prognosis was likely shared by millions of Americans who didn’t vote for Trump.
But his prediction ended up being quite wrong. Since Trump’s election, the stock market has trended upward, with the Dow Jones industrial average, the Standard & Poor’s 500-stock index and the Nasdaq composite index all reaching historic highs.
But is this really due to Trump’s election? Trump certainly thinks so, boasting to reporters, “The reason our stock market is so successful is because of me. I’ve always been great with money, I’ve always been great with jobs, that’s what I do.”
However, some argue that the growth on Wall Street is just a continuation of the long-running bull market that started shortly after Barack Obama’s election. Or it could be a product of global trends. Revising his initially dreary forecast, Krugman recently said, “Stocks are up about the same amount all around the world, which is certainly not specific to Trump.” Trump’s detractors argue that his erratic style is actually a hindrance, despite any growth in stock markets. To them, turmoil in the West Wing, threats of war with North Korea, and the ongoing investigation of collusion with the Russians have produced the sort of economic and political uncertainty that Wall Street dislikes.
To evaluate these claims, we examined three major market indexes (the Dow, the S&P 500 and Nasdaq) from Jan. 5, 2009, to Dec. 22, 2017. We constructed a statistical model that captures the general upward trend in stocks since early 2009 but also examines whether there were changes in that trend that occurred after Trump’s election victory. (Details about the model are here.)
The results do show a change after Trump won: The pace of the upward trend in the three market indexes increased. And the estimated impact of Trump’s victory is sizable. Nearly two-thirds of the increase in the Dow since the 2016 election can be attributed to the “Trump” component of the upward trend that began in 2009. The S&P and the Nasdaq also show significant upward moves.
The sources of this “Trump bump” are less clear. One possibility is that he has spurred confidence by repealing Obama-era regulations and working with Republicans in Congress to pass a major tax bill that features a sharp reduction in the corporate rate. Or perhaps stock markets are just reacting to broader trends in the economy. Unemployment for December 2017 (4.1 percent) is the lowest since August 2000, and growth is forecast to be a robust 4.0 percent for the fourth quarter. In October 2017, the University of Michigan Consumer Sentiment Index reached its highest mark since January 2004. The score for November was only slightly lower.
In short, it remains to be seen what exactly Donald Trump has to do with growth in stock markets — even though Trump, like all presidents, has claimed credit for good economic conditions.
However, there is a huge irony: Even though Trump has claimed credit, he has not been given credit — at least in terms of public approval. Indeed, his approval rating has dropped even as the Dow has increased. The correlation between the Dow and Trump’s approval score is massively negative — a correlation of -.74 (the maximum negative correlation is -1). Similarly, it’s Democrats, not Republicans, who have gained in the generic congressional ballot share.
A 39 percent approval rating and a 12-point disadvantage in the generic ballot are dangerous numbers for the president and his fellow Republicans as they head into the 2018 campaign. Thus far, the bull market hasn’t helped their political fortunes. A major question for this election year is whether it will.
Harold Clarke is Asbel Smith professor at the School of Economic, Political and Policy Sciences at the University of Texas at Dallas.
Marianne Stewart is a professor at the School of Economic, Political and Policy Sciences at the University of Texas at Dallas.
Paul Whiteley is professor of government at the University of Essex in England.