President Donald Trump, on Aug. 22: “I’ll tell you what, if I ever got impeached, I think the market would crash.”
Pretty much every market analyst who was asked about that since: “Nope.”
Whether they deserve or not – and they usually don’t – presidents tend to take credit for positive economic news on their watch (and try to defer blame for the bad stuff). Trump, however, takes it to a new level. He’s clearly convinced, against the facts, that he’s not just mostly riding trends he inherited (as I’ll note, there are some exceptions), and all those trends would crash were he not in charge.
For what it’s worth, every expert who was asked about how the markets would respond to Trump’s impeachment said the markets would be fine, if not relieved. Think of it this way: Today’s stock market largely reflects expectations of future corporate profits, with a bunch of skittishness, herd behavior and random noise thrown in. The latter parts drive volatility, so sure, the market would jump around if political uncertainty spiked.
But the underlying recent upward trend in stock prices is driven by the profitability of publicly held companies, nudged up in the Trump era from big corporate tax cuts (and relatedly, share buybacks, which boost stock values), deregulation and low labor costs, even at low unemployment. When investors sense threats to profitability, as from Trump’s trade war, geopolitical provocations, or even just incoming craziness from the presidential Twitter account, markets tend to sell off.
So here’s the punchline to this part of the case: If Trump were impeached and Pence took over, the beneficiaries of corporate profitability would get to keep all the stuff they like and get rid of the Trumpian recklessness they’ve been quietly putting up with.
If this sounds as if I’m saying equity markets would boom under Pence, be assured that neither I nor anyone else can tell you where stock prices are headed. But the logic of markets reveals Trump’s prediction is surely wrong.
That’s more time and analysis than Trump’s statement deserves, but there was another statement in that interview that is more revealing of misguided thinking that goes well beyond the president. His claim was not simply that the market would tank if he was impeached, but that “everybody would be very poor.”
Here he is reflecting the pervasive view that the stock market determines the living standards of working families. In fact, the ownership of stock market wealth, including that from retirement funds, is highly concentrated among the wealthiest households: 84 percent is held by the richest 10 percent, and 40 percent is held by the top 1 percent. The bottom half own virtually nothing.
So, putting aside all this, what does the stock market tell us? Bloomberg’s Joe Weisenthal put it nicely, albeit cryptically, the other day on Twitter. While I and others chant the mantra, “The stock market is not the economy,” Weisenthal added, “but it’s not not the economy either.”
For one, as noted, it’s an aggregator of investors’ expectations about where profits are headed, though that signal includes a lot noise. Relatedly, because the herd can get it wrong, especially late in the business cycle when amnesia about the last bubble takes over, it can provide a signal of “irrational exuberance,” meaning asset bubbles wherein stock valuations depart systematically from reasonable expectations of value.
Based on a recent speech by Federal Reserve Chair Jay Powell, this aspect of financial markets may – appropriately in my view – get increasing scrutiny from Fed officials. Powell pointed out that “Inflation may no longer be the first or best indicator of a tight labor market and rising pressures on resource utilization.” He argued that “destabilizing excesses” in financial markets should also be considered a warning sign of the sustainability of the business cycle.
Do we see such excesses in current U.S. markets? Equity valuations are above average, but so are profits, so I don’t see an asset bubble in stocks. The extent of corporate debt has some analysts worried, but given that interest rates are still low and profits high, debt service does not seem dangerously burdensome. Contagion from Turkey’s problems, as I and others have noted, does not seem to be a big risk factor for U.S. banks.
In other words, the U.S. economy is, as Trump says, doing well. But the problem is that there’s a big difference between how the economy is doing and how the people that comprise the economy, especially the vast majority that depend on paychecks as opposed to stock portfolios, are faring.
In this regard, Trump makes two big mistakes. He conflates markets with people and he thinks he alone controls the economic fate of both.
Jared Bernstein, a former chief economist to Vice President Joe Biden, is a senior fellow at the Center on Budget and Policy Priorities and author of “The Reconnection Agenda: Reuniting Growth and Prosperity.”
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