Commentary / World

The market swoon isn't all about Donald Trump

by Justin Fox

Bloomberg

If one can ascribe a coherent worldview to U.S. President Donald Trump, it is that it’s all about him. That is, everything that happens on this Earth, or at the very least in the United States, is his doing if it’s good and a personal affront to him if it’s bad.

After two years during which things generally went well, and the president claimed credit for it, it is thus only natural to see this month’s stock market sell-off as a referendum on Trump. But while the president’s overly personalized reaction to the downturn may have worsened the market turmoil and could conceivably even unleash an actual crisis — more on that in a moment — it’s worth contemplating what else could be driving it. Here are a few obvious candidates.

Stocks were really expensive. Economist Robert Shiller’s cyclically adjusted price-earnings ratio — the Standard & Poor’s 500 Index divided by the past 10 years of earnings — topped 33 last January, the only time that has happened outside the stock market bubble of 1997 to 2001. Now they’re cheaper but still well above long-run averages.

Technology companies, which have led the market decline this year, are facing uncomfortable realities. For most, it’s that in a tech world dominated by a few super-profitable giants, they’re never going to make much money. For the super-profitable giants, it’s that growth will inevitably slow, while calls for increasing regulation of tech monopolies won’t.

The U.S. remains a slow-growth economy. Federal tax cuts and spending increases brought a big economic boost this year, but that seems to be fading, and with it hopes for the continued corporate profit gains that (in theory, at least) drive stock prices.

The global economy is slowing, too. The biggest question mark may be China, which has been proving doubters wrong for decades but presumably has to have a recession someday. If the world’s second-largest economy (and the largest by some measures) goes into reverse, the rest of the world will feel it.

Central banks are going from buying to selling. After accumulating huge bond portfolios as part of “quantitative easing” efforts to stimulate the economy in the aftermath of the global financial crisis, the European Central Bank is set to end QE soon and the Federal Reserve has actually reduced its holdings by almost $400 billion since October 2017.

Momentum matters more than ever. Human investors have always moved in herds, but the quantitative systems that now control “roughly 85 percent of all trading,” according to The Wall Street Journal, often accentuate that behavior. That can’t explain why stocks started falling, but it may account for some of the big declines of the past week or two.

It is also worth acknowledging that maybe we don’t know what’s been driving the stock market’s decline and never will. I don’t normally do market analysis like this because it’s such a shot in the dark. But the above are all plausible explanations for a market sell-off that can’t really be blamed on the current occupant of the White House, apart from maybe the negative effect of Trump’s trade wars on domestic and global growth.

That the president has nonetheless succeeded in making much of the current market discussion about him is of course a testament to his skill at dominating the media narrative. Of course, when the media narrative is negative, he shouldn’t want to dominate it — the man seemingly can’t help himself.

I think it’s fair to say that, up to now, the Trump presidency has gone better than his detractors warned. That is, the president himself has been exactly the mercurial, poorly informed, making-it-up-as-he-goes operator that he appeared to be before he was elected, but things have generally turned up roses for him both on the campaign trail and in the White House. Even the great defeat of his first year as president — the failure of Congress to repeal the Affordable Care Act — turned out to be something of a blessing as the health insurance law also known as Obamacare grew increasingly popular.

Trump’s behavior over the past month is an indication that he won’t handle less-lucky circumstances well. His criticisms of Federal Reserve Chairman Jerome Powell’s interest rate policies aren’t necessarily wrong; the Fed may well be reacting too slowly to a changing economic outlook. But Trump’s badgering so far seems only to have stiffened the resolve of Powell and the rest of the Federal Open Market Committee, and by talking to aides about firing Powell he has raised the prospect of a real institutional crisis.

This particular storm will probably pass. Money managers will get back from vacation and tweak their quantitative models, the Fed will react to an economy that’s slowing but not screeching to a halt and Trump will find something else to tweet about. Still, (a) I could be wrong about all that and (b) given what we’ve seen over the past couple of weeks, imagine how this president and his shrinking, beleaguered band of aides might react in the face of a real economic downturn, or financial or political crisis. The ensuing debacle really would be all about Trump, although he wouldn’t be the only one paying the price.

Justin Fox is a Bloomberg Opinion columnist covering business. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”

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