Market Turmoil? Blame Trump

Donald Trump Owns This Stock Market
It wasn’t smart to dump a dovish Fed chief, run up the deficit, and start a trade war. Trump did all three.
Bloomberg, December 10, 2018



For those of you who are looking for an explanation why the stock market suddenly become tumultuous in the fourth quarter of 2018, you can stop searching: President Donald Trump.

I don’t say this lightly.

For the better part of the past three years, I have suggested that investors not let their partisan political views influence their choices. This is no longer the case. The Trump administration’s policies, passed as legislation by Congress and implemented by the executive branch, have driven interest rates higher, made deficits bigger and led to a trade war, and are risking a global slowdown and even a recession.

For a while, markets were able to ignore this and absorb the flow of good news about the economy, which finally was shedding the drag from the financial crisis. At the same time, I also said presidents generally get too much credit or blame for the economy, although they can, of course, screw up. Indeed, a president, whether misguided by his advisers or ill-informed (this president has both going for him), can make things much worse. As I wrote earlier this year:

“The word inconsequential is an overstatement, as presidents can and do mess up. Richard Nixon’s opening of formal relations with China had far-reaching consequences; the deregulation of markets under Jimmy Carter, Ronald Reagan, Bill Clinton and George H.W. Bush was surely important for the economy in ways both good and bad; so too was President George W. Bush’s invasion of Iraq. But these were all broad policies that took years or even decades to be felt and understood.”

I assumed that Trump’s aggressive style, economic ignorance and personal peccadilloes wouldn’t leave a lasting mark on either stocks or bonds. Now, roughly two years later, the chaos surrounding this presidency proves that was wishful thinking.

At the risk of engaging in narrative fallacy (with a dash of hindsight bias), let’s consider three distinct policies of this administration, and how they are hurting the economy and markets:

• Higher interest rates: Trump replaced Janet Yellen, a dovish Federal Reserve chief (whose policies he liked), with hawkish Jerome Powell, whose policies he dislikes. Rates have gone higher, and it is the proximate result of the president’s appointment.

There is no one else to blame for this mistake but the president. Powell’s leanings were well known; so too were those of Trump’s appointment for vice chairman, Richard Clarida.

This self-inflicted error is perplexing: When Trump was running for office, he berated Yellen, saying she “should be ashamed that rates were so low.” We have since found out that he did not re-appoint Yellen because he felt that, at 5-foot, 3-inches, she was “too short” to run the central bank. This has to be one of the great unforced mistakes in the postwar history of U.S. monetary policy.

• Global recession concerns: Rising rates have helped push the yield curve toward inversion, with short-term rates higher than long-term rates. At least the five-year and the two-year Treasuries have inverted; the classic recession warning is when yields on 10-year and the two-year securities invert.

Now, we see broader signs that global growth is slowing. Corporate profits may have hit a peak. 1  Economies are cyclical, and the U.S. has gone almost a decade without a recession, roughly two times longer than the average interval between slowdowns. That implies we are overdue for a slump. None of the usual signs of an imminent recession are present, but 2020-21 isn’t an unthinkable time line.

• Tariffs and trade war: Yet another self-inflicted wound seems to have taken place in the aftermath of the G-20 summit in Argentina. Trump announced a ceasefire in the trade dispute with China. Equity futures rallied strongly a week ago on Sunday night.

The truce turned out to be nonexistent. Bloomberg Newsshowed a side-by-side comparison of statements by Trump and by the Chinese government on the supposed deal, which was never reduced to writing. It isn’t just that Trump overstated the terms of the agreement; there was no deal2 Wall Street subsequently had its worst week since March, and it looks like we may be in for more of the same this week.

The president sandbagged Wall Street. Despite his well-known casual relationship with the truth, traders naively assumed the president wouldn’t mislead about something as crucial as the resolution of an expanding trade war. By the time the president declared “I am a Tariff Man,” he had lost the trust of traders.

To be sure, these are not the only factors behind the stock-market sell-off. Rising deficits have spooked bond markets; enthusiasm about the large corporate tax cuts passed in December 2017 has faded; the strong dollar is often cited as a headwind for corporate earnings; U.S. stock valuations remain rich; China’s economy has slowed; Brexit is problematic, and the rest of Europe has more than a few messy problems. Any combination of these could be contributing to market volatility.

That said, we are nearing the halfway mark of Trump’s presidency. Those waiting for that pivot toward his being presidential have been disappointed. Instead, they are now extrapolating his policy errors forward, and finding a significant and negative affect on the U.S. economy and stock markets.

I’m not in the business of making forecasts, so I will pose a question: Does anyone think it gets better from here?



1. To be fair, wags have been calling a peak in corporate profits for a long while.

2. CNBC’s Carl Quintanilla quotes a JPMorgan trading note: “It doesn’t seem like anything was actually agreed to at the dinner and White House officials are contorting themselves into pretzels to reconcile Trump’s tweets (which seem if not completely fabricated then grossly exaggerated) with reality.”




I originally published this at Bloomberg, December 10, 2018. All of my Bloomberg columns can be found here and here

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