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Finance: Trump doesn't seem to understand some key elements of the stock market rally

Finance: Trump doesn't seem to understand some key elements of the stock market rally



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President Donald Trump's tweet calling the recent stock selloff a "big mistake" shows he doesn't fully understand the dynamics driving the equity market.

  • President Donald Trump tweeted Wednesday that a strong economy should be pushing stocks higher, and called the market's recent decline a "big mistake."
  • His tweet shows he doesn't fully understand the dynamics that drive and have been driving the stock market during his term.

Before President Donald Trump tweets any more about the stock market, perhaps a lesson is in order.

On Wednesday, the president addressed the equity market on Twitter for the first time since a brutal selloff that, at its darkest depths, saw more than $2 trillion of US market cap erased.

His point was clear: the stock market should be rising, not falling, because the economy is so strong.

"In the 'old days,' when good news was reported, the Stock Market would go up," Trump wrote. "Today, when good news is reported, the Stock Market goes down. Big mistake, and we have so much good (great) news about the economy!"

It's an awfully simplistic view of the market, and one that shows just how limited the president's understanding of the big picture can be.

Not all market environments are created equal

But before we get into the criticism, let's start with what he got right. He's correct in stating that experts view blistering economic growth as a headwind to further stock gains. They fear an overheating economy will drive inflation higher, prompting the Federal Reserve to speed up monetary tightening, which would in turn make bonds more attractive compared to stocks.

He's also right when he says this hasn't always been the case. And that assertion brings us to the first big flaw in his reasoning: that all market environments are created equal.

Strong economic growth hasn't been a huge impediment to the markets in the past because inflation has stayed stubbornly low. This has created what Wall Street has dubbed a "Goldilocks" situation, where the economy isn't too hot, nor too cold — it's just right.

This relationship also helps explain why strong inflation-linked economic data like wage growth is one of the things that some experts say helped spur recent stock losses. Put simply, that's the kind of economic growth that makes equity investors cautious.

So when Trump argues that good news about the economy should push stocks higher, he's also missing the unique situation the US is in right now.

Taking credit for the stock market's gains

A more nuanced criticism of Trump's overall approach to the stock market is a familiar one: he takes credit for equity gains for which he isn't necessarily responsible. This is a topic that Business Insider has explored in depth in the past, concluding that while Trump has intermittently boosted US stocks, he's far from the only positive driver.

Most recently, the successful passage of the GOP tax bill received credit for the bullish adjustment in Wall Street corporate profit expectations at the start of 2018, which in turn boosted stock indexes to record levels. But one could just as easily argue that those stretched valuations played a large role in the recent market reckoning — something for which Trump would never try to take credit.

Wall Street says a market correction is healthy

The last point that should be made about Trump's tweet is that he's overreacting. By calling the decline a "big mistake," he's ignoring an important tenet of the stock market — that it can't go straight up, and pullbacks are healthy.

When the market was selling off, strategists across Wall Street recommended that traders buy the dip, the term used to describe when investors use more attractive valuations to increase positions. And wouldn't you know it, US stocks have already started to recover.

The fact that Trump saw a sharp but ultimately moderate decline in US stocks as a reason to criticize current market psychology shows that he either doesn't understand that corrections are healthy, or he's far too intolerant of market weakness.

Either way, the president would be well-served to take a step back and consider all angles driving stocks.

After all, if the market does roll over in more substantial fashion in the future, blaming it on market dynamics he doesn't fully understand isn't going to fly.



Click here to read the full text by Joe Ciolli

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