Jobs, jobs, jobs,” Donald Trump tweets out to the world. “This is all about the Make America Great Again agenda,” he trills in praise of the stock market’s latest record high. “Six trillion dollars in value created!”
The president is not shy about his promises to the American people. His popularity ratings are plummeting and he is fighting back on the economy.
Growth is strong. Stock markets are soaring. Bill Clinton campaigned with the maxim “the economy, stupid” and Trump has taken the message to heart.
After all, the other problems tend to pale into insignificance beside unemployment. Look at the way the US president bellows each time the stock market hits a new high.
“The stock market has been creating tremendous benefits for our country in the form of not only record-setting stock prices, but present and future jobs, jobs, jobs,” he wrote last week. “Seven TRILLION dollars of value created since our big election win.”
The Stock Market has been creating tremendous benefits for our country in the form of not only Record Setting Stock Prices, but present and future Jobs, Jobs, Jobs. Seven TRILLION dollars of value created since our big election win!— Donald J. Trump (@realDonaldTrump) January 7, 2018
It riles Trump’s many opponents no end, generating tens of thousands of often mocking or derisive replies.
“What goes up must come down”, other doom-mongers warn, calling the record highs evidence of a bubble.
The market has been rising since 2009, others note, arguing this proves it is nothing to do with Trump.
The president may have been lucky in his inheritance, but that does not mean his policies have had no effect.
In the years immediately after the financial crisis markets were driven by ultra-loose monetary policy. But that support is drying up. The Fed is cutting back its stock of assets and interest rates are on the up.
So far markets are also taking this as good news. It looks like a return to a benign normality – strong economic performance combined with low inflation means only gentle rises in interest rates and so sustained rising stock markets.
This is being supercharged by Trump’s tax cuts, and his moves to cut old red tape and limit the introduction of new regulations.
“The US passed its tax reform package – we were always a bit on the fence as to whether or not it would pass – and the details of it are pretty positive,” says Jim McCormick at NatWest Markets, noting that the benefits to firms come right at the start of the programme, indicating an immediate boost to profits.
Analysts at BNP Paribas estimate the tax package combined with extra government spending in the US could add 0.7 percentage points to GDP growth in 2018. It should keep boosting stocks as the reforms were not completely priced into markets.
“The Bill itself will provide a boost to earnings, and if you layer on top of that another firm year of economic growth, you’ve got another 15pc earnings growth over 12 months,” says Macquarie economist David Doyle.
With a supportive global economic environment there is no reason to think these market gains cannot continue, as firms make the most of Trump’s policies.
Even as the Fed gradually tightens policy, quantitative easing globally is pumping more money into the markets and credit conditions are improving, so the backdrop remains supportive for stocks.
“It is very difficult from an analytical perspective to be anything but positive,” says McCormick’s colleague Andrew Roberts. “And you’ve just taken off the big risk to the world which was China turning the tap off. So you’ve taken away that risk. I think that is behind a lot of the spurt we’ve seen in equity markets.”
Better still, strong stock markets create positive sentiment among businesses, investors and shareholding households. That confidence encourages more investment, more hiring and more consumer spending, boosting shares in a positive cycle.
“There are feedback loops and causality which run in both directions. Rising equity markets and the fall in the cost of capital for firms is probably a factor which is contributing to one element of the improvement in economic activity, namely a greater willingness of the corporate sector to invest,” says Larry Hatheway at asset manager GAM Investments.
Dow goes from 18,589 on November 9, 2016, to 25,075 today, for a new all-time Record. Jumped 1000 points in last 5 weeks, Record fastest 1000 point move in history. This is all about the Make America Great Again agenda! Jobs, Jobs, Jobs. Six trillion dollars in value created!— Donald J. Trump (@realDonaldTrump) January 5, 2018
Roger Farmer, professor of economics at the University of Warwick, at the University of California, Los Angeles, and research director at NIESR, has studied more than 60 years’ worth of data on the stock market’s effect on jobs and growth. This weight of evidence convinces him that optimism increases demand which directly leads to higher employment.
US unemployment is already at 4.1pc, the lowest level in 18 years, and he believes the strong market will pull more people into work. “The market went up 25pc last year and if it keeps going, which I expect it will, I am expecting at least 15-20pc gains from the market this year. Unemployment cannot go a huge amount lower but it can keep going down,” he says, adding that people who are not even looking for work at the moment will come into the market.
“Labour force participation is still very low compared to, say, UK standards. As long as the market keeps going up I think you can expect the real economy to keep growing.”
He fears the midterm elections could “derail the whole thing” if it results in a strong showing for the Democrats and impeachment proceedings against the president.
“Short of that, I am very bullish on growth, I am very bullish on the stock market. Even though the market is high, it has still not reached the peaks it had in the dotcom boom around 2000. I don’t see any upper bound to where it could potentially go,” he says.
“I think the substance to Trump’s statements about fuelling growth in the economy through deregulation and through tax cuts – that is certainly not going to reduce inequality, so if that is something you are concerned about it is not a good thing. But if all you are concerned about is increasing employment, real growth and increases in the stock market, I don’t see that slowing in the near term.”
This leads him to conclusions which are rarely voiced among economists: Trump is right on at least one topic.
“There are detractors who, anything he says, sling mud at the man. Although there is much to sling mud at, I think here [he] is right,” says Farmer.
The professor expects a market crash at some point, but sees the broad upward trend of prices across history as evidence that this fear is no reason to stop investing.
The cause of a crash could echo those of the Eighties and Nineties when inflation bubbled up, forcing central bankers to hike rates rapidly, sending stocks tumbling and slamming the brakes on economic growth.
So far the Fed has avoided that fate, putting the US and its markets into a “goldilocks theme”, in Roberts’ words.
Hatheway believes markets may be complacent, underestimating both the risk of inflation and the risk of the Fed responding sharply to any rise in prices. Trump’s own tax plan contains another risk too – it is not just made up of giveaways.
“In the tax reform legislation, there are incremental negatives for earnings growth into 2019 and beyond”, says Doyle, fearing the celebrations might grind to a halt after a 2018 of stronger earnings “as some of the deductions and loopholes in corporate tax start to close”. He adds: “That could present an issue for the markets.”
Trump’s other policies too could end up haunting the markets. A key fear when the president was elected was that he would trash the global trade system and impose taxes and barriers on international transactions.
So far relatively little from those risks has emerged, but Nafta renegotiations are coming up which could change that.
“Protectionism could artificially bring inflation back,” says NatWest’s Roberts, as it takes the global market out of the equation, forcing up prices either through border taxes or more expensive domestic production.
It could cause interest rates to shoot up, crashing the market and making finance more expensive at a slower pace of growth. That would mean a drive for “jobs, jobs, jobs” could be scotched, creating quite the opposite result.