Trump Isn’t to Blame for Everything, But He Does Own Wednesday's Drop
It is hard to garner sympathy for politicians, but there are often times when an objective analysis indicates that our political leaders get a raw deal when it comes to the economy. As I have said many times in the past, the U.S. economy generally does its own thing in spite of, not because of, politicians, which usually makes it as absurd to criticize them when things go wrong as it is to heap praise on them when things go right. Even when they do enact policies that change the direction of the economy, it makes the economic conditions more reflective of past Presidential administrations and Congresses than the present. Still, when things go wrong, the President gets the blame.
The stock market, however, is, as we are often told, not the economy. And, as I watched the market tumble once again on Wednesday as the Fed raised rates, I was struck by the thought that the severity of that reaction was almost entirely down to Donald Trump. I realize that that will be an unpopular conclusion for many people, but I promise you it is not born out of any intentional political bias, just a rational analysis.
Let’s face it. The Fed didn’t do anything unexpected on Wednesday. The 25-basis point hike in the Fed Funds rate was exactly what the market expected and had priced in, and the softer tone on future decisions that emphasized awareness of data was what most of us thought traders were seeking. Despite that, as you can see from the chart below, the S&P 500 dropped rapidly from its intraday highs as the announcement was made and during the subsequent press conference.
Stocks have been falling for some time, so there was no “buy the rumor, sell the fact” effect here. The reaction therefore only makes sense if, despite the news being precisely what had been expected for a while, it was still somehow perceived as disappointing. That is where Donald Trump comes in. His tweets leading up to the decision did two seemingly contradictory things. They raised hope among some that the Fed would change course, while simultaneously ensuring they would not.
The hope came from the fact that Fed Chair Jerome Powell is a Trump appointee. Some people evidently believed that made him more likely to do the bidding of his political master, but that was to ignore who Jay Powell is. As I wrote when his appointment was first revealed, Powell is a Republican, but his history at the Carlyle Group and as a central banker show that he doesn’t always follow any party line. Up to this point at least, he has shown himself to be an astute businessman and an independent thinker, and long may he continue in that vein.
However, it is that determination to be independent that forced the Fed’s hand on Wednesday. Once Trump started tweeting that they should not raise rates, the FOMC would have felt obligated to do so. Even if some members of the committee thought that the slight softening evident in data merited a pause in the hikes, the fact that that would make it look like the Fed was giving in to political pressure made that impossible. The Fed’s independence, and the appearance of such, is far more important than any short-term concerns.
One could argue that all of this volatility is Donald Trump’s fault. The effects of tariffs on the U.S. and the global economy is one of the things on traders’ minds, for example, and there is no way of knowing what influence the upcoming conclusion of the Mueller report is having on investors’ decisions to unload U.S. equity positions. That, however, is to fall into the trap I mentioned earlier. Cyclicality is probably far more on the minds of sellers right now than politics. Since World War II, the average time between U.S. recessions has been just under six and a half years, and the last one ended around nine and a half years ago. You could say we are due.
In that context, acting in expectation of a downturn soon is simply logical. Protectionist policies and political turmoil don’t help, but then we were only as high as we were in October because of the market’s positive reaction to tax cuts and deregulation. If you blame the President for the 15% drop in the S&P over the last couple of months, you also have to give him credit for the 41% rise that followed his election, something I’m sure his critics would be reluctant to do.
Wednesday, however, was different. The only logical explanation for an otherwise illogical reaction to expected news is that Trump’s attempts to influence the decision and make things better backfired. Your view on who, if anybody, to blame for the two-month drop probably depends on your political views, but whatever they may be, Wednesday’s losses can be attributed to Trump.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.