Spend a decade or two writing about financial markets, and a few themes will begin to emerge. These are:
No. 1. Politics and investing do not mix;
No. 2. Presidents usually get too much credit when things go right and too much blame when things go wrong;
No. 3. Most of the time, markets don’t care about politics. But the president and presidential appointees can and do have a major impact on the economy, monetary policy, the dollar, trade relations and alliances;
No. 4. History is replete with examples of presidents messing up and stumbling into wars, aggravating recessions and market crashes, even inflicting long-term structural damage on the nation.
Points 3 and 4 deserve extra consideration, since they seem most applicable to the current state of economic affairs. In other words, the broader economy, the market, and any potential recession are now firmly attached to, and under the influence of, President Donald Trump.
Trump came into office in the midst of a robust recovery from the financial crisis, with an economy operating at close to full strength. Between 2010 and January 2017, when Trump was sworn into office, the economy created 16.1 million jobs (5 million have been added under Trump) and the unemployment rate had been cut by more than half, from 10% to 4.7% (it has declined 1% under Trump). As of June 2009, when the recession ended, the expansion had been underway for 91 months. Perhaps the president’s most favored metric, the stock market, had already risen 236% from its March 2009 low.
In other words, Trump inherited an accelerating post-credit crisis recovery, and he only had to avoid disrupting those healthy — and improving — economic trends. What occurred instead is a litany of unforced errors and misguided decisions, many of them made by Trump political appointees. Let’s consider just two of the more consequential ones that are driving events:
• Peter Navarro, the architect of this president’s trade and tariff policies, particularly vis-à-vis China. Trade wars, despite what Trump said, are neither fun nor easy to win. Mainstream economists have been warning that Navarro was in over his head and that his unsound trade theories would cause economic problems. Indeed, the Navarro brand of protectionism has already had a number of damaging economic consequences, blunted for now only by the momentum of the economic boom Trump inherited. We are about to find out exactly how long that will last.
• Jerome Powell, an inflation hawk who Trump appointed as Federal Reserve chair. Unless you prefer high rates, this was an almost unaccountably foolish choice. Trump fired Janet Yellen as Fed chair, reportedly because he thought she was too short for the job, and after disparaging her management of monetary policy, saying she “should be ashamed of herself.” The irony is that Yellen was an inflation dove, who favored lower rates for longer as the economy was still recovering when Trump took office. That irony no doubt is lost on Trump as he rails against Powell and the higher rates he adopted — something Trump called for when Barack Obama was president and fighting the worst recession in three-quarters of a century.
But don’t blame Navarro or Powell; it’s not like they sold themselves as something other than what they are.
Making appointments merely to troll one’s predecessor is something less than smart. Expertise matters, as does the ability to vet your appointees. If the president today is unhappy with higher rates, well, he has only himself to blame. And if China is proving harder to wrestle with in trade negotiations, maybe the president shouldn’t have been so quick to pull out of the Trans-Pacific Partnership. That deal (remember how great the president is at deals?) would have lined up the U.S. and almost a dozen other nations as counterweights to China and its trade policies.
Actions have consequences, and the undeniable consequences of this president’s actions are rates that are higher today than they would otherwise have been and worldwide trade disruption.
To be sure, we can’t place all of the blame on Trump for the economic slowdowns in Europe and China, for the chaos of Brexit and other issues that predate his term in office. Much of the unsettled environment was already in place. He was just the spark in the gas-filled room.
My original thesis in 2016 was that investors who were blaming Trump for market volatility were being partisan and unobjective. To damage this stock market, Trump would have had to do a series of things that were ill-advised and counterproductive. As it turns, he has done just that. If a recession occurs in 2020 — and the current model of the Federal Reserve Bank of New York puts it at a 32% chance in the next 12 months — a good measure of the blame must go to this president.
Trump reveled in taking credit for the boom he inherited. If the U.S. goes into a contraction, he shouldn’t be surprised if the “Trump recession” label sticks.