The physical distance from Washington to Wall Street is but a few hundred miles, and, of course, the two places are incalculably enmeshed in each other’s business. But even in these days of endless information, there’s a strikingly clear way in which Washington and Wall Street talk past each other.
Basically, the markets — by which I mean investors’ expectations — heavily discount our dysfunction. For all their complex financial analysis, much (not all) analysis of the Washington/stock-market nexus tends to be simplistic.
This has been no more evident than in the case of President Trump, as markets leaned way over their skis with expectations that all sorts of goodies in the form of tax cuts, infrastructure spending and market deregulation would soon be climbing on the Acela at Union Station (first-class car, of course, and heading up to Wall Street).
But, in every case, a close observer could see problems right out of the gate.
- Sequencing problems: On health care, it was clear that all the Republicans knew was that they hated Obamacare. It was just as clear that they would need a replacement, which they didn’t have, and thus the decision to go with health care before tax cuts meant they would be bogged down from the start.
- The BAT spat: I admit that I didn’t think they’d have as much trouble with tax cuts as they’ve been having — that’s their brand! — but that’s partly because I didn’t see the Border Adjustment Tax fight coming. This idea, favored by influential Republicans, split their caucus, as importing businesses were not entertained by economic arguments that once currency markets adjusted, they’d be fine.
- Red ink: Perhaps investors were remembering the George W. Bush years — when big, regressive tax cuts were quickly forthcoming. But they overly discounted the fiscal outlook at the time: Bush inherited President Bill Clinton’s budget surpluses. While Republicans don’t care as much about deficits as they pretend to — otherwise, they wouldn’t be talking about tax cuts, for which there’s no clear economic rationale — they do care about optics. So that’s slowing them down, too.
- Amateur hour: Team Trump has no legislative chops. They pay no attention to the substantive and political groundwork necessary to move legislation, and they have a tendency to get … um … a bit distracted. “Infrastructure” sounded good to them (it sounds good to me, too), but most congressional Republicans weren’t interested, and Trump’s plan was, and is, a confusing mash-up of tax credits for private investors, which can’t work for most public goods.
At any rate, I found the figures below from Goldman Sachs Researchers to be quite interesting. They plot a number of measures of policy expectations showing that such expectations have largely shed their initial excitement about the legislative future of the Trump agenda. The top two panels show the performance of stocks sensitive to (left panel) tax policy and (right panel) infrastructure, compared to the rest of the market. The lower left panel makes a similar comparison for bank stocks (which got excited about financial market deregulation), and the lower right panel shows inflation expectations (reflecting, in turn, macro-growth expectations).
In every case, these metrics got a Trump bump. And, in every case, that bump has faded as reality has set in.
Are the markets right about all this? I still think there’s a tax cut coming, but I’ve long said it will be smaller and come later than investors expect. Now, with the Russian scandal heating up, I’d push its birth date out even further, maybe 2018, second half. As for financial deregulation and infrastructure, I suspect (and fear) executive actions on the former and not much on the latter.
It took you long enough, but welcome to my world, Wall Street. Buckle up: It’s going to be a bumpy ride.