Why hasn't the stock market crashed yet, and why is it doing so well?
August 4, 2017 1:08 PM Subscribe
As it says up top, I'm wondering why the stock market hasn't crashed since Trump took office, and why it seems to be doing well. I would have thought that the predicted chaos of having an inexperienced tyrant in office would have tanked the markets. I imagine some of it is carryover from Obama, but what else explains this effect? Investor faith in a conservative economic agenda? Or is this upswing actually a bad thing, like a false spike before a crash? Or something else completely?
For example, a small retirement investment account I have from an old part-time job has stayed at about $2000 since I left six years ago, and I haven't made any contributions in that time. (I think it even went down a couple hundred dollars a few years back). However, it's now gone up to over $2800, which is a huge jump given its past performance.
Please assume I know nothing about this, so no explanation is too simple. Thanks!
For example, a small retirement investment account I have from an old part-time job has stayed at about $2000 since I left six years ago, and I haven't made any contributions in that time. (I think it even went down a couple hundred dollars a few years back). However, it's now gone up to over $2800, which is a huge jump given its past performance.
Please assume I know nothing about this, so no explanation is too simple. Thanks!
The sorts of people in the position to make big market moves are also the sorts of people who really enjoy republican economic policies. They're not the ones panicked about Trump policies. He's not an inexperienced tyrant, he's just an idiot who'll give them all tax breaks.
posted by phunniemee at 1:24 PM on August 4, 2017 [10 favorites]
posted by phunniemee at 1:24 PM on August 4, 2017 [10 favorites]
As Etrigan says, the stock market had been on a good run for several years prior to the election, and nothing has happened in the *economy* that would indicate a major slowdown. There was some talk of a "Trump bump" right after the election but I think that was mostly bogus. Really, the stock market cares more about the the health of the corporate sector and the economy than it does about politics. The corporate sector is doing quite well right now - and has been for awhile - and the economy overall is mostly OK. So the stock market's rising.
It's broadly true that lot of the people who make decisions in the stock market are people who favor Republican economic policies, but stock markets have gone on plenty of bull runs while Democrats are in power so I don't think that has very much to do with it. It's really just that whoever occupies the Oval Office has less control over the economy and the market - at least in the shorter term - than is widely believed.
If you want to get a little more technical there is some feeling that perpetually low interest rates have driven a flood into equities, which has driven up stock prices...but that's been going on for awhile, and, again, is mostly unrelated to the political situation.
posted by breakin' the law at 1:31 PM on August 4, 2017 [10 favorites]
It's broadly true that lot of the people who make decisions in the stock market are people who favor Republican economic policies, but stock markets have gone on plenty of bull runs while Democrats are in power so I don't think that has very much to do with it. It's really just that whoever occupies the Oval Office has less control over the economy and the market - at least in the shorter term - than is widely believed.
If you want to get a little more technical there is some feeling that perpetually low interest rates have driven a flood into equities, which has driven up stock prices...but that's been going on for awhile, and, again, is mostly unrelated to the political situation.
posted by breakin' the law at 1:31 PM on August 4, 2017 [10 favorites]
The New York Times had an article on this very thing a couple of days ago.
"None of the soap opera in Washington matters,” said Frank Sullivan, chief executive of RPM International, a Cleveland-based maker of specialty coatings and sealants like Rust-Oleum. “Nobody in business cares about who talked to who in Russia.”
What does matter, Mr. Sullivan said, is stronger global demand in heavy industries like mining and oil and gas, a weaker dollar that helps exporters, and a lighter regulatory touch by the new administration.
Even more to the point:
Besides steady economic growth or less regulation, investors also have been encouraged by the loose reins of central banks like the Federal Reserve, which have helped keep interest rates not far above their historic lows. Inflation, too, remains tame, with price increases in recent months actually falling short of the Fed’s targets.
At the same time, with yields on safe assets like government bonds so minuscule, there are few appealing alternatives to stocks for investors, according to Torsten Slok, chief international economist at Deutsche Bank.
“No matter how you look at valuations, they are high,” he said. “But as money flows into pension funds every month and needs to be invested, why would I put it in bonds?
“Corporations in America and Europe are still inventing new products and finding ways of doing things more efficiently,” Mr. Slok said. “This is separate from the political theater around the world.”
posted by holborne at 1:33 PM on August 4, 2017 [9 favorites]
"None of the soap opera in Washington matters,” said Frank Sullivan, chief executive of RPM International, a Cleveland-based maker of specialty coatings and sealants like Rust-Oleum. “Nobody in business cares about who talked to who in Russia.”
What does matter, Mr. Sullivan said, is stronger global demand in heavy industries like mining and oil and gas, a weaker dollar that helps exporters, and a lighter regulatory touch by the new administration.
Even more to the point:
Besides steady economic growth or less regulation, investors also have been encouraged by the loose reins of central banks like the Federal Reserve, which have helped keep interest rates not far above their historic lows. Inflation, too, remains tame, with price increases in recent months actually falling short of the Fed’s targets.
At the same time, with yields on safe assets like government bonds so minuscule, there are few appealing alternatives to stocks for investors, according to Torsten Slok, chief international economist at Deutsche Bank.
“No matter how you look at valuations, they are high,” he said. “But as money flows into pension funds every month and needs to be invested, why would I put it in bonds?
“Corporations in America and Europe are still inventing new products and finding ways of doing things more efficiently,” Mr. Slok said. “This is separate from the political theater around the world.”
posted by holborne at 1:33 PM on August 4, 2017 [9 favorites]
There's some evidence the Trump bump is ending. A big part of the early boost with Trump's election is investors anticipating a tax windfall for corporations. A big tax holiday is likely for companies with lots of cash parked offshore. Companies like Apple, Google, Microsoft, Pfizer, etc have been sheltering income offshore for years waiting for a chance to bring it back to the US tax-free. They may finally get it.
The other half of this is the market not worrying about the chance that Trump gets us all killed, or wrecks the US economy. On that point investors are apparently optimists.
posted by Nelson at 1:34 PM on August 4, 2017
The other half of this is the market not worrying about the chance that Trump gets us all killed, or wrecks the US economy. On that point investors are apparently optimists.
posted by Nelson at 1:34 PM on August 4, 2017
Also, nothing -truly- awful, like repealing ACA, gutting Medicare, or defaulting on the debt, or some foreign crisis that the toddler can't bungle his way out of, has happened ... yet. The budget deal that did get passed this spring ended up with none of the punitive chops proposed; they caved.
Keep holding your breath, everyone, it's worked so far.
posted by Dashy at 1:48 PM on August 4, 2017 [5 favorites]
Keep holding your breath, everyone, it's worked so far.
posted by Dashy at 1:48 PM on August 4, 2017 [5 favorites]
Dashy raises a good point: As horrific as Trump has been, nothing THAT awful has happened yet. Hopefully he just continues bungling along with a growing cloud of scandal hanging over him until he goes away.
I don't know that markets would care very much about ACA repeal, or even gutting Medicare (which isn't to say that these are good policies, they're not). But if he decides to muck with the debt ceiling, or if there's a big foreign crisis - possibly even one of Trump's making - watch out.
posted by breakin' the law at 2:02 PM on August 4, 2017
I don't know that markets would care very much about ACA repeal, or even gutting Medicare (which isn't to say that these are good policies, they're not). But if he decides to muck with the debt ceiling, or if there's a big foreign crisis - possibly even one of Trump's making - watch out.
posted by breakin' the law at 2:02 PM on August 4, 2017
A book I enjoyed which you might, too, is Manias, Panics, and Crashes. It talks about some of the conditions which make crashes likely. A credit bubble, in which there's widespread borrowing atop shaky security - like, say, subprime mortgages circa 2007 - is a common cause of crashes. The discovery of widespread fraud is a crash trigger, too. In both cases, investors realize that what they thought was going on isn't what's actually going on, and everybody tries to get out of the market ASAP until things are clear again.
Of course, a crash could happen tomorrow. For a couple of years, various analysts have been arguing that we're in another tech bubble, and that it's bound to burst one of these days. So far, though, the companies driving the price growth (Apple, Google, Facebook, Amazon, Microsoft) have had very strong earnings, enough that their stock market valuations look reasonable in historical terms. But if we find out that they're lying about how much money they're making, or if their profits take an unexpected dive, we'll be in for some market chaos.
Another bubble that might be set to burst is Canada's housing bubble.
The biggest thing that Trump could do to trigger a crash is create a situation where there's a credible threat that interest on U.S. government bonds might not be paid. Since the net worth of so many investors and institutions and governments leans heavily on the value of U.S. government bonds, that would hit the markets like a tsunami. It would have to be a credible threat, though.
posted by clawsoon at 2:05 PM on August 4, 2017 [2 favorites]
Of course, a crash could happen tomorrow. For a couple of years, various analysts have been arguing that we're in another tech bubble, and that it's bound to burst one of these days. So far, though, the companies driving the price growth (Apple, Google, Facebook, Amazon, Microsoft) have had very strong earnings, enough that their stock market valuations look reasonable in historical terms. But if we find out that they're lying about how much money they're making, or if their profits take an unexpected dive, we'll be in for some market chaos.
Another bubble that might be set to burst is Canada's housing bubble.
The biggest thing that Trump could do to trigger a crash is create a situation where there's a credible threat that interest on U.S. government bonds might not be paid. Since the net worth of so many investors and institutions and governments leans heavily on the value of U.S. government bonds, that would hit the markets like a tsunami. It would have to be a credible threat, though.
posted by clawsoon at 2:05 PM on August 4, 2017 [2 favorites]
More than any other factor, the stock market is an indicator of the anticipated strength of corporate profits, which makes sense, because that's the whole point of buying stocks--to participate in the profit-making ability of a business. Most of the things that Trump has indicated he and Congress will actually do are not a threat to corporate profits in the short term, or probably even medium term. Some things, like reducing regulations and lowering corporate income tax are the exact things corporations would want. Others, like deporting 10 million undocumented immigrants, would be pretty bad for corporate profits, but nobody on Wall St. has ever believed that would happen. Yet others, like a ban on muslim immigration or building a border, wall would be pretty immaterial for corporate profits.
It's good to keep in mind that the stock market is not a straightforward indicator of the country's economic health in general. Stocks have been doing terrifically for about 8 years now, if you had invested in the S&P in February 2009 and reinvested all dividends, your annual growth rate would be about 16%! That's great for investors. But overall growth in the economy has been sluggish, less than 2% averaged over the last 8 years. That's a measure of the economy as a whole, and indicates that for the whole country, things have been getting slightly better very slowly.
posted by skewed at 2:17 PM on August 4, 2017 [1 favorite]
It's good to keep in mind that the stock market is not a straightforward indicator of the country's economic health in general. Stocks have been doing terrifically for about 8 years now, if you had invested in the S&P in February 2009 and reinvested all dividends, your annual growth rate would be about 16%! That's great for investors. But overall growth in the economy has been sluggish, less than 2% averaged over the last 8 years. That's a measure of the economy as a whole, and indicates that for the whole country, things have been getting slightly better very slowly.
posted by skewed at 2:17 PM on August 4, 2017 [1 favorite]
I had a conversation with my financial advisor about this just last week. He seems somewhat bewildered, and... almost angry?, that things are going as well as they are despite Trump being president. As in, what does it say about the world that the people with financial influence aren't phased by a person like Trump being in power. This is coming from a Canadian perspective mind you.
The best explanation he could come up with is that:
a) the people with influence are pro-Republican financial policies (tax cuts!)
b) but that they also don't think Trump will actually be able to follow through on any/most of his crazier ideas, and
c) that people have learned from the last housing crisis that too much deregulation is a bad and they won't make mistakes like that again.
No joke, our meeting probably went a good 45 minutes longer than it should because we got distracted by talking about politics and Trump (and climate change, because we keep getting supposedly "once-a-century" rainfalls and the water level in Lake Ontario is ridonkulous and higher than its been in either of our lifetimes).
I think we both regret joking, back in October 2016, about "Ha Ha can you imagine what would happen to the stock market if Trump won the election? But that could *never* happen...".
posted by Secret Sparrow at 2:57 PM on August 4, 2017 [3 favorites]
The best explanation he could come up with is that:
a) the people with influence are pro-Republican financial policies (tax cuts!)
b) but that they also don't think Trump will actually be able to follow through on any/most of his crazier ideas, and
c) that people have learned from the last housing crisis that too much deregulation is a bad and they won't make mistakes like that again.
No joke, our meeting probably went a good 45 minutes longer than it should because we got distracted by talking about politics and Trump (and climate change, because we keep getting supposedly "once-a-century" rainfalls and the water level in Lake Ontario is ridonkulous and higher than its been in either of our lifetimes).
I think we both regret joking, back in October 2016, about "Ha Ha can you imagine what would happen to the stock market if Trump won the election? But that could *never* happen...".
posted by Secret Sparrow at 2:57 PM on August 4, 2017 [3 favorites]
Fundamentally the stock market represents the value and/or fortunes of publicly traded companies -- so it's not really relevant in any direct sense who the president is, or how smart they are. What matters is: "How much profit is i.e. Ford going to make?".
posted by so fucking future at 4:09 PM on August 4, 2017
posted by so fucking future at 4:09 PM on August 4, 2017
It will but not necessarily because of Trump
“No matter how you look at valuations, they are high,” he said. “But as money flows into pension funds every month and needs to be invested, why would I put it in bonds?
This is the really scary thing about the stock market.
posted by fshgrl at 7:55 PM on August 4, 2017 [1 favorite]
“No matter how you look at valuations, they are high,” he said. “But as money flows into pension funds every month and needs to be invested, why would I put it in bonds?
This is the really scary thing about the stock market.
posted by fshgrl at 7:55 PM on August 4, 2017 [1 favorite]
The stock market has been on a long upswing since 2009, interrupted by only a few relatively brief draw-downs before continuing upward again. We're in the 8th year of a bull market and Trump has been president 6 months - you do the math on how much it has to do with him versus larger economic trends.
posted by Mid at 8:36 PM on August 4, 2017 [2 favorites]
posted by Mid at 8:36 PM on August 4, 2017 [2 favorites]
A couple other factors not already mentioned above:
- a huge fraction of the US market gain has been driven by just 6 tech stocks: the FAANGs+M (Facebook, Apple, Amazon, Netflix, Google, Microsoft) Amazon is the New Tech Crash
- central banks, particularly in the EU, have driven interest rates to almost zero, creating 'free money' for companies to sell bonds and then turn around and buy back their own stock to drive up their stock price.
That second one has gotten so bad the Euro junk bonds are now yielding the same as US 10yr Treasuries. Euro Junk Bonds and “Reverse Yankees” Go Nuts In no rational universe can junk bonds be worth more than T-Bills - the clear signal is the market is not making any sense.
posted by cfraenkel at 9:23 PM on August 4, 2017 [4 favorites]
- a huge fraction of the US market gain has been driven by just 6 tech stocks: the FAANGs+M (Facebook, Apple, Amazon, Netflix, Google, Microsoft) Amazon is the New Tech Crash
- central banks, particularly in the EU, have driven interest rates to almost zero, creating 'free money' for companies to sell bonds and then turn around and buy back their own stock to drive up their stock price.
That second one has gotten so bad the Euro junk bonds are now yielding the same as US 10yr Treasuries. Euro Junk Bonds and “Reverse Yankees” Go Nuts In no rational universe can junk bonds be worth more than T-Bills - the clear signal is the market is not making any sense.
posted by cfraenkel at 9:23 PM on August 4, 2017 [4 favorites]
Whatever else Trump will do, he's not going to add any additional regulation that will raise costs.
The market is a big boy that can manage just fine without the government holding its hand.
posted by jpe at 12:59 PM on August 5, 2017
The market is a big boy that can manage just fine without the government holding its hand.
posted by jpe at 12:59 PM on August 5, 2017
The S&P 500 is not a good way to look at the US economy. Just about half of revenues of the S&P 500 are from abroad, and for the largest companies (which dominate the value of the index), it's more like two-thirds. These are multi-national companies that happen to be headquartered in the US, but do just as much business in Europe and Asia. These international revenues are extremely strong, partially because the dollar has declined in value, but also because other countries are doing really well economically.
The Russell 2000 is a better snapshot of the US economy. These are smaller companies that do business almost entirely within the US. It did have a "Trump bump" -- it increased about 15% the week after the election, and has stayed there since. This seems to reflect a plan/hope that corporate income taxes will decrease.
posted by miyabo at 3:09 PM on August 5, 2017 [2 favorites]
The Russell 2000 is a better snapshot of the US economy. These are smaller companies that do business almost entirely within the US. It did have a "Trump bump" -- it increased about 15% the week after the election, and has stayed there since. This seems to reflect a plan/hope that corporate income taxes will decrease.
posted by miyabo at 3:09 PM on August 5, 2017 [2 favorites]
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posted by Etrigan at 1:21 PM on August 4, 2017 [4 favorites]