Two very different dynamics are afoot:
1) The stock market’s on a tear, up 11 percent since the election (12 percent including dividend payouts, compared with about zero over the comparable period before the election). CEOs parade out of meetings with President Trump, gleeful as they promulgate endorsements of the new president, who clearly makes them feel much better than did his predecessor.
2) Trump’s public comments continue to tout his election victory, flout the facts (The Post Factchecker reports: “Out of the 35 days tracked through Feb. 23, there have been no days without any recorded false or misleading claims”), deny the obvious chaos in the White House, and rail against the media (in an unprecedented move, he also banned certain news outlets, including CNN and the New York Times, from a briefing). The Republican Congress is gridlocked on tax cuts and Obamacare repeal. Trump’s executive order banning the entry of people from seven Muslim-majority countries and Russia’s apparent involvement in the U.S. election are raising profound legal and security questions, while Cabinet appointments, including those of commerce secretary and U.S. trade representative, remain unconfirmed (thus, nothing yet on trade policy).
Given the events in No. 2, how could market participants and CEOs conclude everything’s fine? You could cite Calvin Coolidge’s adage that “the business of America is business,” but many of these CEOs lead firms whose businesses depend on steady, well-anchored American leadership to administer global trade, immigrant flows and predictable tax policies.
At one level, the market rally seems based on expectations of tax cuts for businesses and deregulation, both of which imply higher profitability and are probably forthcoming (though they’ll probably arrive at a later time and deliver less than markets expect). For example, the Dodd-Frank financial law requires lending institutions to hold more capital as a buffer against loan losses. If that requirement is loosened, lenders can use that currently walled-off capital to buy assets, potentially increasing their bottom lines (and, not incidentally, raising systemic risk).
But at a deeper level, the source of the Trump rally is this: It’s a massive sigh of relief from the investor class born of the realization that they dodged a distributional bullet.
Deep inequalities are embedded in our economy, forces that suppress the pay of low- and middle-wage workers, channel productivity growth to the top of the scale, block collective bargaining, promote austere fiscal policy, hold back labor standards such as overtime pay, and reward assets instead of paychecks. When Sens. Bernie Sanders (I-Vt.) or Elizabeth Warren (D-Mass.) say “the system is rigged,” this is what they’re talking about. When the economist Dean Baker writes about upward redistribution through the tax code, patents and trade policy, this is what he’s talking about.
Trump explicitly campaigned against this rigged system. He handily vanquished scads of primary opponents by inveighing against Wall Street, trade and the establishment’s neglect of a beleaguered middle class. Though many saw through his faux populism, enough decided to throw the dice and see what he might do on their behalf. And, of course, racism, xenophobia and fear of the “other” were in the mix as well.
Establishment, business-and-investor-class Republicans may not have been terrified of Trump, but they knew that with Jeb Bush or Sen. Marco Rubio (Fla.) or pretty much any of the standard-issue alternatives, they’d be more assured of holding on to their structural advantages. And they certainly didn’t like Trump’s anti-Wall Street and globalization rants.
Then they saw his tax plan, which was even more generous to millionaires on up than House Speaker Paul D. Ryan’s. And they saw his Cabinet, that merry band of billionaires, not one of whom poses the slightest threat to the investor class. Perhaps they’ve also “priced-in” the feckless congressional majority that can’t, as in point 2 above, seem to get its act together to do much of anything, in which case, it’s all executive orders, provocative tweets, and titillating fights with that alleged “enemy of the people,” the media.
It may well be that the markets are leaning over their skis a bit too far and that fading the Trump rally right about now might be the smart play. It’s certainly the case that when Treasury Secretary Steven Mnuchin says the stock market will “absolutely” be a report card on administration policy, he’s making a rookie mistake: There’s a correction out there somewhere.
But broadly speaking, to answer the question I posed at the top, yes, the markets know something, and it’s this: For all the chaos, gridlock, ethics violations, security breaches, and even threats to democracy from media suppression, the top few percent remain firmly insulated. Most of the economy’s pretax growth will continue to flow their way, and the forthcoming tax changes will probably see them doing even better in the after-tax distribution.
And yet, there’s something markets aren’t considering, because they don’t yet have to, and it’s that the Trump presidency has awakened and energized an opposition that has been missing in action for decades, as conservatives racked up countless victories at the sub-national and congressional levels. The depth and effectiveness of that opposition is yet to be seen, of course — so much of this is new. And a key question is what happens to Trump base voters when, as is inevitable, he fails to improve their economic outlook. Do they, too, join the opposition?
So stay tuned and don’t try to time the market. It’s sure to be a bumpy ride.