The Stock Market’s “Trump Bump” Is Over | Markets Are Dumb 2

With today’s video we go all in on discussing the US stock market. There’s this idea that stock markets are somehow rational, or serious. People who talk about it are always wearing suits, and we put a lot of effort into making all the details of interest rates, portfolio management, and valuations seem boring. The stock market is none of these things. In fact it’s nuts. By going through the history of the “Trump Bump”, I attempt to draw the curtain back a bit.

Unfortunately, watching the video, I think I screwed something up. It’s not that the story I put forward is wrong, it’s just that I left too much out. The video falls into the “Presidents impact everything” school of commentary. I hate that school. The differing views market makers took of Trump and Obama are tremendously important to this particular economic story, but that doesn’t mean that presidents are actually all that powerful. I really don’t want to create that impression, and I apologize if I did so with this video.

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Video Transcript after the jump…

Hey there! Today I’m going to go waaaay outside my wheel house and explain a thing or two about the stock market. Specifically I’m going to address the “Trump Bump”, the incredible rise in the stock market since Donald Trump was elected. You won’t learn this reading the Washington Post or the New York Times but there’s a growing sense in some quarters of the US that Trump must be doing OK, because hey, a lot of people are making money. The “Trump bump” story is a big part of this. Well I think it’s nuts. Today I’ll explain why.

Now the economy and the stock market are two different things, but they are connected. They feed back into each other in ways that I could make a very long video failing to explain. It’s all tremendously complicated. What we do know is that for the past 100 years or so, the US stock market has been a very good investment. The right strategy is to find solid companies buy their stocks, and never sell them no matter what the market does. There are tons of people at banks, and hedge funds, and on news channels who are paid a lot of money to pretend they know a better strategy than that.

They don’t. I covered this last time. In the long term, the stock market reflects the success of the US economy, more or less. Outside of a crisis, that’s not what matters in the short term. The most important facet in the performance of financial markets day to day, month to month and even year to year is confidence. Things go up when people think they should go up. They go down when that confidence disappears. Economic Reality does eventually intrude, but it takes a while.

That’s what happened in 2008. Despite endless evidence saying it wasn’t true, everybody was super confident that House prices would go up forever. Then one day they weren’t. What matters here is who makes the decision. For house prices in the 2000s, it really kind of was everybody, or at least a large slice of the US population that believed something that wasn’t true.

For the US stock market it’s a much smaller group. Back before the 2008 crisis, it was estimated that 62% of US citizens were invested in US equities to some degree. In 2017, that figure was only 54% which is a shame, because the ride since 2009 has been one of the most lucrative in history. The economy has grown slowly and steadily, and the markets have gone steadily up with only small plateaus here and there. Between Trump’s election in 2016 and January of 2018 however, however, the markets kicked into overdrive. Trump’s administration will tell you that this because he has somehow magically changed everything, but that’s not it. It’s about confidence. And it’s about the confidence of a much smaller group than 54% of the American people…

That 54% mostly has very small slices, through pensions, or in their retirement accounts. As with income, wealth is super unequal in this country. As of 2017, the top 10% had 75% of the wealth in the United States, and a significant portion of of that wealth is in the Stock Market. So what do we know about this 10%? Well with the exception of Oprah, some athletes and entertainers, and some of the younger slices of Silicon Valley, they generally didn’t like Barack Obama.

Was race a part of this? Absolutely. The vast majority of the people making decisions in the stock market are still old white men, and there was a racial element in their lack of confidence in Obama. But there is more to it than that. Despite the fact that Obama was the most fiscally conservative president of the 21st century,THAT’S A REALLY LOW BAR he talked like an old school Jimmy Carter style democrat. He wasn’t quite as enthusiastically bought out by Wall Street as the Clintons were, and that scared rich people. Obama was the only non-business fellating president we’ve had since the 1970s.

To make it worse, Old white man media kept screaming about what a socialist he was, so old white men put their money and confidence into crap like gold rather than the stock market. Very few wealthy people actually like Trump, but they like Republicans, so when he was elected they decided that the happy days were here again, and jumped back into the markets in a big way. The fundamentals hadn’t really changed much, but having an old White Republican in power was enough for the people who actually own most of the stocks. And this confidence is changing the fundamentals of the US economy. This isn’t fair, and it isn’t rational, but we’re talking about the US economy here, which has never been either of those things, and never will be. Markets are dumb.

But there’s another level to this, that may be even more important. Those old white men who own the stock market are guided by an even smaller class of people. They are the stock brokers, analysts and business media types that live in New York, and have made themselves rich pretending to know what the economy is going to do. They come from everywhere, but a lot of them come from places like Staten Island, Long Island and Queens. They grew up in the shadow of the big show in Manhattan, and they’ve scrapped and strived to be part of that show for their entire lives. If they’re not from New York, they work to become part of that Fuggedaboutit Wall Street culture. These people don’t just identify with Donald Trump, they are Donald Trump. So of course their confidence in the markets is surging.

The “Trump bump” doesn’t have much to do with what Trump has done, it has to do with who he is. The Trump bump actually ended about a month after he signed his tax cuts into law. I’m going to go ahead and disagree with Warren Buffet here, and say that I think the Trump tax cut has already been priced into the market. That cut is great for businesses, but I don’t think the market has much higher to go. For almost five months now the Dow and the S&P 500 have been failing to reach January’s highs. Reality is intruding, and I suspect that the Trump Bump is over. It could be 5-10 years before the next big crash, but I doubt we’ll be seeing any more large gains. These indicators could easily remain stagnant for a decade…

But what the hell do I know? I wrote this video two weeks or so ago, and I could already be wrong about this prediction. If you’ve been paying attention to this series, you know that nobody knows anything. Markets are dumb! Tune in next time when we talk about an even more egregious example of Confidence warping markets, Recep Tayyip Erdogan and the Turkish economy…