The market can remain irrational longer than you can explain that President Donald Trump is going to have a hard time keeping his economic promises.
It's not quite as catchy, but it's probably what John Maynard Keynes would have to say about the Dow's run-up in response to the election if he were around today. Indeed, as Bloomberg's Matt Levine points out, markets seem intent on taking Trump's inflammatory proposals seriously but not literally — that is, hoping he'll stick to tax cuts and infrastructure — at the same time that he is literally doing what they seriously don't want him to. This is a close cousin of “alternative facts.” It's selective ones. The question, then, is how long Trump's, I guess, fourth honeymoon will last if markets figure out that there's a little more to governing than just tweeting.
Now, there's a long list of things markets don't like, but somewhere on it are building a wall along the Mexican border, banning refugees from Muslim countries and threatening to start a trade war. All of them signal, in political, economic or moral terms, that the United States will no longer underwrite the liberal international order that has helped make the world so rich the past 70 years. Which, to say the least, are not the priorities Wall Street was hoping for. They thought this was all just campaign rhetoric that, like Trump's pledge to “drain the swamp,” was meant to win friends at the polls but not influence people making policy. After all, Trump had gone from bashing bankers before Nov. 8 to turning his cabinet into a Goldman Sachs reunion after it. Didn't that show that Trump's promises to the big banks were more equal than his promises to everybody else?
Well, maybe not. It's not just that Trump has backed up his tough talk about trade and immigration like Wall Street hoped he wouldn't. It's that he might have a tough time cutting taxes and boosting spending like they hoped he would. Take corporate tax reform. It might seem like a sure thing that a Republican White House, Senate and House of Representatives would be able to agree on this, but it's a lot less so when their plan might actually increase taxes for retailers like Walmart. That's because it would start taxing imports so that it could stop taxing profits quite so much. Economists, of course, say that this would make the dollar rise enough that imports would be less expensive and the tax on them wouldn't be an increase for anyone, but CEOs aren't willing to bet their bonuses on it. Wall Street shouldn't either. There aren't many examples of political parties potentially raising taxes on some of their donors to pay for tax cuts for some of their others.
It's the same story with infrastructure. Trump's ideological consigliere Steve Bannon wants a trillion-dollar infrastructure package that would be “as exciting as the 1930s,” but the rest of the Republican Party isn't too enthused about this. They'd rather focus on the things they've been waiting years to do, like repealing Obamacare and slashing the safety net and coming to terms on some tax cut for the rich. The Democrats, for their part, want to rebuild our roads and bridges, but they don't want to do it the way Bannon does. They'd rather have the government spend the money directly on what it thinks the most important projects are than give private companies tax breaks to do what it thinks the most profitable ones are.
In other words, all the stimulus the market thought would help the economy in the short-term might not materialize, but all the isolationism that would hurt it in the long-term is already starting to.