The date was March 3. A new president walked into the White House briefing room with the British prime minister. The stock market had dropped by a thousand points in the previous weeks, and no one knew just how long and how far it would fall. Investors were spooked; pundits were anxious. The president had no intention of talking about the stock market but in response to a question he gave a perfect answer:
“What I’m looking at is not the day-to-day gyrations of the stock market, but the long-term ability for the United States and the entire world economy to regain its footing. And, you know, the stock market is sort of like a tracking poll in politics. It bobs up and down day to day, and if you spend all your time worrying about that, then you’re probably going to get the long-term strategy wrong.”
And then he added:
“On the other hand, what you’re now seeing is profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal if you’ve got a long-term perspective on it.”
The reaction was swift and brutal, referring to the president as “Stockpicker in Chief” and the “First Stockbroker” and partisan opponents rushing to condemn the comments. A few hours later, the White House press secretary effectively walked back the president’s remarks, and for the next seven and three quarters years the president never repeated anything like this.
The president in question, of course, was Barack Obama—and I was one of his economic advisers. We had inherited an economy in freefall, shedding over 700,000 jobs each month. Since the collapse of Lehman Brothers, the Dow Jones Industrial Average had lost more than 40 percent of its value. Every word we said about the markets or the economy was scrutinized, criticized, agonized over. And the president’s statements most of all—as he learned the hard way that day in March.
The funny thing is, Obama’s investment advice was actually pretty good. Had he wanted to push back on the uniform discouragement from his advisers and outside commentators, he would have had a lot of ammunition. Less than a week after Obama’s comments, the market hit bottom, and while the president had talked about a long-term perspective, you only needed to hold an index fund tied to the S&P average for a week after his comments to get a 3 percent return, or for a year to get a phenomenal 61 percent return.
But he learned his lesson anyway. The stock market figured occasionally in Obama’s rhetoric over the coming years, but always in a supporting role and featured the general direction of the market not day-to-day fluctuations in the Dow. Most of the time, he kept his mouth shut.
As just about anyone with a smartphone or a television knows, President Donald Trump, famously, has not shown anything like this restraint, constantly tweeting the Dow’s every new milestone. And there have been many new milestones, just like there had been in the rapid rise of the markets just about every year since March 2009. In fact this past year was the first time in the last eight years the U.S. underperformed the dollar-denominated returns in most major global markets.
It was not just Trump bragging about what had happened—his top economic advisers predicted what would happen. This was new: President Bill Clinton’s rhetoric on the stock market was shaped by his first National Economic Council Director Robert Rubin’s mantra that markets go up and markets go down. Trump’s NEC Director Gary Cohn evidently did not learn the same lessons at Goldman Sachs. In an interview with Axios several days after the tax legislation was finalized and effectively a done deal, Cohn said, “I don’t think a lot of tax reform is in the stock market,” predicting further stock market increases. The S&P 500 is back where it was when he made the prediction.
There’s nothing wrong with being optimistic about America’s economic future—just like Obama was in March 2009 and Trump was throughout his first year in office. This optimism may even have some short-run benefits, as increased consumer and business confidence over the last year may have contributed to a pickup in economic growth. But absent firmer foundations such confidence-fueled booms are rarely sustainable and long-lived, especially when the economy is close to producing at its full potential, as the U.S. economy is today.
Using day-to-day stock market movements as a proxy for expressing this confidence is, however, a financial, economic and likely political mistake.
It is a financial mistake because Cohn seems to have forgotten the elementary lesson that markets often react rapidly to events and had surely priced in most or all of the tax bill by the time he made his comments, months after the reform discussion began and as Congress was passing the bill. Fundamentally, I am still torn about the correct valuation of the market, but a bubble that is liable to a significant correction is a real possibility. And the best argument against a bubble is that stock returns are expected to be much lower in the future—which would explain the low ratio of earnings to prices (put another way, the discount rate is lower so the present discounted value of future earnings—or the stock price—is higher).
It is an economic mistake because the stock market does not directly matter to the 48 percent of Americans who do not own stocks directly or indirectly through a mutual fund. And the stock market’s relationship to what really does matter to most people—jobs, wages and the like—is only indirect and noisy. For evidence just look no further than the nearly 5 percent decline in the S&P since last Friday’s Bureau of Labor Statistics report of the fastest wage 12-month wage growth since the economic recovery began. Or look at the 1.2 million jobs created in the six months after the market fell 13 percent from November 2015 to February 2016.
Finally, as should now be obvious, it is a political mistake because as Bob Rubin said, markets go up and markets go down. Similarly it would be a political mistake if anyone turned the decline in markets into an argument against President Trump—after all, they may go up again and, in the meantime, who wants to cheer on while trillions of dollars of wealth are being wiped away?
Presidents have a limited and very indirect effect on stock markets and even on the economy more broadly. While every president has touted economic successes during his term—and at times even overplayed their roles in these successes—it would be better to define success as the longer-term, broad-based benefits that matter more to Americans and are at least somewhat more closely related to actual economic policies. Trump may learn that lesson yet.
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