‘The president clearly set himself up’: Trump’s stock market miscalculation

NEW YORK — President Donald Trump is learning a basic and painful lesson of Wall Street: Stocks also go down.

A global market sell-off that began Friday continued into Monday with the Dow Jones Industrial Average plunging more than 1,500 points in afternoon trading. After a volatile trading session, the Dow ended down 1,175 points, or 4.6 percent, at 24,346.

The big slide comes alongside growing concern that an economy juiced by a massive corporate tax cut, and already at full employment, could overheat and require forceful action from a new and untested Federal Reserve chairman — installed by Trump — to cool things down.

On top of concerns about rising inflation, the tax cuts are already increasing the federal government’s need to borrow and accelerating the date by which Congress must raise the federal debt limit. And as of Monday, there was still no plan in Washington to raise the limit and avoid a catastrophic default.

Trump bragged about the gains at every opportunity on Twitter and even in his State of the Union address.

The result is that a president who tossed aside traditional presidential caution in cheerleading the stock market now stands poised to take the blame for any correction.

“This is a risk that the president clearly set himself up for,” said Charles Gabriel of Capital Alpha Partners, a Washington research firm. “Until now, Trump’s had kind of a free ride in this market and taken so much credit for it, even though so much of it was due to easy-money policies from Janet Yellen and the Fed. Now she’s out the door and volatility is back.”

Jerome Powell, the new Fed chair installed by Trump and sworn in Monday, is not expected to deviate sharply from Yellen’s gentle approach to raising interest rates. But he is a lesser-known figure on Wall Street.

And if the recent jump in hourly wages gets pushed up even more by corporations handing out bonuses and pay bumps in the wake of the tax bill, the Fed may be forced to move faster to fight inflation — offsetting the economic benefits of the tax cuts.

Interest rates are already rising as the government discloses it will have to ramp up borrowing in 2018 to make up for revenue lost to the tax-cut bill. Higher rates on government bonds make stocks look less appealing. They also can make it harder for businesses and consumers to borrow and spend, possibly slowing the economy.

U.S. President Donald Trump gave an address that Republicans called “normal” — a word rarely associated with a Trump speech | Chip Somodevilla/Getty Images

On top of all this, stocks blew past traditional valuations as they raced ahead in 2017 and early 2018. A widely followed ratio designed by economists Robert Shiller and John Campbell that compares stock prices to corporate earnings hit 34 this year. The historic median for the ratio is 16.

This could have served as a warning to Trump not to associate himself too closely with a rally that looked tenuous to many Wall Street analysts. Instead, Trump bragged about the gains at every opportunity on Twitter and even in his State of the Union address.

“The stock market has smashed one record after another, gaining $8 trillion in value,” Trump said in his address to Congress.

Last week’s decline alone wiped out nearly $1 trillion in that value, according to S&P Dow Jones Indices.

Trump has regularly boasted on Twitter that the stock market rise, which actually began in 2009 at the end of the last recession, is the direct result of his policies on taxes and regulation.

“Business is looking better than ever with business enthusiasm at record levels. Stock Market at an all-time high. That doesn’t just happen!” he tweeted last August.

Other senior administration officials such as Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn have also tied the market’s gains directly to Trump policy moves.

Unemployment in the U.S. is low, corporate profits are strong, and growth in the first quarter is currently running as fast as 5.2 percent.

Stocks are still far higher than they were when Trump took office, but the return of sharp volatility — and the possibility of further declines — has now put Trump in the uncomfortable position of being directly associated with daily market moves.

“Presidents historically haven’t commented on the stock market anywhere near as much as President Trump has,” said Ed Yardeni, market analyst at Yardeni Research Inc. “I think Barack Obama said something in 2009 about how he thought stock prices seemed low, and that was about it. So he obviously likes to take credit for the positives. Now what does he say when the market suddenly goes down?”

So far, Trump has not weighed in publicly on the market declines. A White House official sent a statement to CNBC on Monday expressing concern over the drop. “We’re always concerned when the market loses any value, but we’re also confident in the economy’s fundamentals,” the statement said.

Both the U.S. and global economies are in fact on stronger ground than they have been in years, leading many Wall Street analysts to suggest that the current bout of selling represents something of a healthy correction to stock market valuations and not the beginning of a bear market.

Unemployment in the U.S. is low, corporate profits are strong, and growth in the first quarter is currently running as fast as 5.2 percent, according to the most recent estimate from the Atlanta Fed. Europe and Japan are also growing, a kind of synchronized global expansion not seen in recent years.

U.S. President Donald Trump called for bipartisanship during his address to Congress | Mark Wilson/Getty Images

“Corrections of 5% to 15% occur on average once a calendar year,” Jason Pride, director of investment strategy at Glenmede, wrote in a client note Monday. “Further, history has shown the market capable of making it through such corrections and going on to positive returns for the full year period, particularly in cases of ongoing expansions.”

The market may indeed quickly reverse course in the coming days and go on to move higher over the course of the year, allowing to Trump to start bragging again and possibly aiding Republicans in their efforts to tout the tax-cut bill and limit potential losses in the midterm elections.

But significant risks lie ahead in Washington. The biggest is whether Powell and the Fed can navigate a difficult path between allowing the economy to thrive and wages to rise without letting potentially crushing inflation take hold. And if Powell and his colleagues decide they need to pump the brakes hard, that could leave them in direct conflict with a president not shy about criticizing people he himself put into office.

And it could leave Trump with regret about jettisoning a Fed chair whom Wall Street came to love. “For the past four years, Yellen was the fairy godmother of the bull market,” said Yardeni. “And now that she’s gone, maybe we don’t get the fairy dust anymore.”

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