The “Trump Rally”

I began blogging in February 2009.  In early March the US stock market bottomed out, and has since soared more than threefold.  I’d like to believe that’s no coincidence, but I don’t see anyone claiming that I caused the rally.  OK, except Matt Yglesias:

The Scott Sumner Rally

As we look at the sharp rise in the US stock market following today’s important monetary easing announcement, I think we should all tip the cap in the direction of Scott Sumner whose influence is an amazing blogosphere success story.

But other than Matt (who is far too generous), no one seriously connects me with the stock market rally. So why do so many of my commenters link the recent rally to Trump?  And why (a completely separate question) do they think that a Trump generated stock market rally would somehow show his policies were good for the economy?

Here’s the Financial Times:

While equity market euphoria at the prospect of President Donald Trump’s spendthrift, deregulatory agenda remains undimmed, bond investors are sending a very different message.

US equity gauges have continued to climb this year, propelled by hopes of deregulation, tax cuts, government spending and more business-friendly policies. This week all four of the biggest stock indices achieved yet another “Grand Slam” of fresh records in the wake of President Trump’s speech to Congress earlier this week.

In contrast, there are few signs that fixed income investors think the new administration will be able to jump-start the economy, leading to a durable growth spurt and ultimately much higher interest rates.

“The bond market is taking a totally different view from the equity market. Blowing raspberries is a good way to put it,” says Jim McCaughan, chief executive of Principal Global Investors. “There’s no belief that the growth agenda will be dramatic.”

Before people jump all over me, let me point out that I am on the record predicting that the GOP victory will lead to a small rise in the growth rate, mostly from tax reform and deregulation.  Maybe a few tenths of a percent.  I also think that part of the stock market rally can be attributed to the GOP victory (both Trump and holding the Senate.)  But keep in mind that this was all priced in the day after the election.  If anything, people are becoming increasingly pessimistic about the pace that bills will move through Congress.  And global growth prospects have been rising in recent months, and this rally began before the election.  It’s not all Trump.

Also keep in mind that the stock market is not the “the economy”.  It’s easy to visualize bank deregulation boosting bank profits, or corporate tax reform boosting corporate after-tax profits.  It might also boost total wealth (I think it would), but that’s a much tougher argument to make.  If I were someone like Paul Krugman, I’d say the (supply-side) economic reforms will not boost growth, but will merely redistribute wealth from workers to corporations.  That’s why the stock market has shown more evidence of rising growth expectations than the bond market.  My own view is slightly more nuanced, somewhere between the supply-side denialism of the left, and the starry-eyed faith of the near infinite abilities of Mr. Trump on the alt-right.

Johnny Carson used to have a skit called something like “Kids Say the Darndest Things”.   I think of that when I read comments from Trump supports.  No idiotic statement by Trump is too ridiculous for them to defend.  “If you look at it at this angle from the sun, through this kaleidoscope, Trump was actually right”.  A new fav is commenters telling me that I’m a hypocrite because I like using market tests for policy shocks, and I’m not doing that with Trump.  I guess these people have never heard of event studies.  Or that markets immediately price in new information.

Update:  Art Linkletter, not Carson, although Carson did something similar.

Think back to all the times between 2009 and 2014 when I argued that the soaring stock market proved that Fed policy was right on course.

Think back to all the times when I said that skyrocketing stock prices proved that Obama’s big government instincts were doing a swell job of helping the economy.

On a given day, I sometimes gave a thumbs up to a specific Fed decision, based on the immediate stock market reaction, just as the day after the election I acknowledged that markets seemed to be predicting slightly faster growth.

Actually, this problem goes well beyond stupid commenters. In a genetic sense, none of us are that that far ahead of cave men.  We are hardwired to think in terms of human beings, and especially human leaders, not abstractions.  We are also hardwired to think in terms of small local problems that could do us great harm.  Like a nearby saber-tooth tiger.  Both of these traits cause us to lose all sense of proportion when it comes to politics and the economy.  The two big mistakes are:

1.  The Great Man Theory of History.

2.  Ignoring Smith’s maxim of there being a great deal of ruin in a nation.

The flip side of Smith’s observation is that even pretty significant reforms, which actually create a lot of wealth in dollar terms, have an utterly trivial impact on the overall GDP.  So we vastly overestimate the power of the President to change the course of history, and even where he does so, we vastly overestimate how much something like the Keystone pipeline will help the overall economy.

And don’t be fooled by my “passion” on Trump’s buffoonery.  If I get into a passionate argument over whether Harden of Westbrook deserves the MVP, or whether the Oscars are idiotic, it doesn’t mean that I view these issues are determining the fate of our republic.  Before the election I said Trump’s announced policies would be a disaster if enacted, but that there was no chance they would be enacted.  I’m passionate because I’m flabbergasted that other people don’t see that he’s obviously a buffoon.  That’s all.

Commenters will tell me with a straight face that the soaring stock market between 2009-16 had nothing to do with Obama, but the current (smaller) increase “proves” Trump is Making America Great Again.   It reminds me how Republicans will tell you about all the awful scandals the Democrats are involved with, but then deny the scandals on their own side, while the Democrats do the exact opposite.  I’ve always argued that politics takes 15 points off a person’s IQ (including mine), but I think with Trump we need to boost that to 30.  I’ve never seen such a dramatic case of mass self-deception in so many otherwise intelligent people in my entire life.  Or maybe I’m the one who’s self-deceiving, and all the Dems who think only the GOP is corrupt, and all the Republicans who think only the Dems are corrupt, are both right.  Maybe the rules of logic don’t apply to this universe.

So by all means continue to defend your “tribe” in the comment section, and I’ll continue to view you as a big hairy cave man holding a club.

PS.  How bad have things gotten?  Trump’s defenders will claim that his staff was lying about a possible amnesty for illegals, just to sort of mess with the press.  Yes, we’ve reached the point where calling Trump a liar is considered a defense of the man.  But I don’t think it was a lie.  My hunch is that Trump really does want to switch immigration from family re-unification to the more skills-based approach of Canada/Australia.  To do that he needs Congress, and to get Congress to agree he’d need to compromise on the illegals.  I doubt this will work, but I actually do think this is his thought process.  He can’t possibly believe that he can dramatically change our immigration policy without the help of Congress.  Even I don’t think he’s that dumb.

PPS.  Notice how I deny any role in the stock market rally, but still feel a need to link to Matt’s 2012 post



30 Responses to “The “Trump Rally””

  1. Gravatar of Ray Lopez Ray Lopez
    3. March 2017 at 08:28

    Sumner: “I’m passionate because I’m flabbergasted that other people don’t see that he’s obviously a buffoon” – your credibility and humanity would be greatly enhanced with me if you, professor, agree you are a buffoon at times. Lots of times. A smart buffoon, but still a buffoon (I am also the same way). You cannot take yourself seriously all the time, anymore than I do. Only a low IQ poster like a Trump supporter takes himself seriously.

    As for the Trump rally, the important thing is animal spirits in such a short time. The Obama rally was a “dead cat bounce” from depressed circumstances. Different animal. As for the bond market blowing raspberries, time will tell, and maybe a former bond trader like dtoh? or the other nym can opine more.

  2. Gravatar of David Pinto David Pinto
    3. March 2017 at 08:36

    Thank you for reminding people the economy has little to do with who is president.

    Up until and during election nights, the markets seemed to indicate a preference for the election of Hillary Clinton. In fact, the sell off as it became clear that Clinton was going to lose prompted this from Krugman:

    If the question is when markets will recover, a first-pass answer is never.

    That may be up there with Dewey Defeats Truman.

    I would be curious to know how much cash mutual funds were holding during the election. I would hypothesize that they were holding more than usual, since their was a great deal of uncertainty about the direction of the economy, or they simply didn’t care to put their money in stocks with a democrat in control. When Trump actually won, and the republicans held Congress, they simply plowed that cash back into the stock market, since they thought the environment might be better for stocks, and they are really not supposed to sit on cash.

  3. Gravatar of Benny Lava Benny Lava
    3. March 2017 at 09:15

    Great to read a post that references Thomas Carlyle. Also I made the cut and am still read. Actually kinda sad to see what happened to MF in the comments.

    I like the Trump posts but I also really like the China posts. I was just thinking yesterday about how few wars China has engaged in over the last 50 years vs America. Especially the last 20. Peace and prosperity. America could learn a thing or two.

  4. Gravatar of ssumner ssumner
    3. March 2017 at 10:31

    Ray, That’s why I don’t ban you. I’m flabbergasted that any one person could get so many things wrong.

    David, I also expected stocks to fall modestly, based on the pre-election moves. In retrospect, I now think stocks would also have risen under Hillary. (And at least I didn’t sell!)

    Benny, Good point, China’s actually never been all that expansionist, relative to its size and power. The areas it took over (Tibet, etc) were pretty minor compared to something like the British Empire. China’s very nationalist, but it’s an odd sort of isolationist nationalism.

  5. Gravatar of John John
    3. March 2017 at 10:36

    If we’re looking at market reactions the so called “trump rally” only took place from Nov 7-11. Trump and the Republican congress are both promising to slash corporate tax rates from the average paid rate of 21% to a flat 15%. If that happened and corporate earnings remained exactly the same you would see a 7.5% rally in stock prices. Empirically, the stock market rallied about 5.7% between Nov 7-11. So perhaps people are discounting the strength of the reforms, but the so called “trump rally” looks like a corporate tax story to me.

    No one has any clue what the effects of fiscal stimulus, tariffs, deregulation are or when these reforms will even materialize, so it seems unlikely the market is taking those into account.

  6. Gravatar of Steve F Steve F
    3. March 2017 at 11:16

    The President matters. Big time. By himself the President can tank the economy or can significantly improve growth.

    I’m very happy that we have a President who understands expectations better than just about anybody I’ve seen.

  7. Gravatar of foosion foosion
    3. March 2017 at 11:56

    “If I were someone like Paul Krugman, I’d say the (supply-side) economic reforms will not boost growth, but will merely redistribute wealth from workers to corporations”.

    I did say that, on this very blog.

    BTW, regarding “Kids Say the Darndest Things”,

  8. Gravatar of Michael Rulle Michael Rulle
    3. March 2017 at 12:20

    As large as our government has grown, spending is still only about 1/4 of the size of the entire economy. Further, a large percentage of government spending is just transfer payments, mostly from people who are young back to those same people when they are old. If one looks at GDP graphs over time, it seems unlikely that that there is any correlation between growth and the party in power.

    The private sector still dominates in size but has gradually been stymied by regulations and constant threats/promises of policy change, leading to uncertainty. But the end result has been a mish mash combo of left and right policies set in stone (soft stone maybe) that have been put in place over time and are very hard to change. Therefore as big as Government is we tend to over estimate its influence on the economy.

    The same is true for the stock market. It has not mattered who is in power over time. It is not determinant of price action. I infer from this that regardless of the current ideology or factoids du jour (Trump is a moron, the left is unhinged, Russia is in charge of our elections) the party in power has only a marginal impact on economic activity. What has changed over the past 75 years is that growth has declined and the volatility of growth has declined as both parties have shared power basically equally. I am unsure why. My best guess is both parties have preferred lower volatility in exchange for higher growth.

    We now have the 3rd highest P/E in history (Schiller 10year)—-which means there is still room to rise. Both previous high P/Es ended badly—though not as badly as the 58% drop in 2007-2008 which was not preceded by historical high P/Es.

    My guess is Trump’s victory has caused the rally, because of hopes for deregulation and lower taxes. But hopes are not facts (other than facts about hopes). The 10 year fell in price quickly (yields rose about 80bps in a week or three) right after the election but has essentially been stable since then, while the stock market keeps moving. I don’t know know if that means bonds are “supportive” of the stock market or not.

    I am not suggesting there are no such thing as “better” policies and “worse” policies. But I am suggesting it does not really seem to matter who is in power when looked at over time. Despite ideology differences, actions of government change very slowly over time. It really does remind me of the the old academic joke about faculty politics being so vicious because the stakes are so low.

    Signal to noise is hard to determine. But noise dominates signal. We argue about noise, but the signal moves at a snail’s pace. We have had 45 presidents and half the country hated each of them. Nothing has changed. I’m not a political nihilist. I do believe there are such things as better policies and worse policies. But our balance of power structure makes change happen slowly, which I think is good. There is no question we have gradually moved more left over time, and the right has been dragged along with it. What is right today, was left 50 years ago, etc.

    No one really cares about Trump, except useful idiots of the Democrat Party. Do you really think that Democrat Party believes Trump is a Russian mole or whatever? The Dems are fearful that their forward looking 50 year reign of power has gone down the tubes—hence the absurd desperation to find the Manchurian candidate. If I were them, I would be more patient. All parties eventually fail. I do hope we get a slight push to the right over the next 4-8 years but it is a 50/50 proposition at best.

  9. Gravatar of Benny Lava Benny Lava
    3. March 2017 at 12:26

    I also think an interesting story related to China is how much building they are doing in Africa. I might have mentioned that before. Makes me wonder why America doesn’t build more in Mexico besides walls. Or what that says about America’s ability to take on vital construction projects like highways and bridges.

  10. Gravatar of Geoff Orwell Geoff Orwell
    3. March 2017 at 13:34

    The trends in stock and bond markets were in place well before the election. EPS growth is largely coming from the recovery in oil and gas following a horrid 2015, but the rest of the market is also going along fine. The s&p does look quite high from a valuation perspective but not outrageously so, fwd PE ratios look fine, toward the top of the range but nothing like say 2001. Tax cuts and deregs will obviously help, as will higher rates for banks. But the erp has been the big driver for valuations which makes sense given how nervous everybody was heading into the election; now that it’s becoming clear Trump wont be able to do that much damage, except some token pro business and immigration stuff, it seems reasonable that the erp is falling sharply.

    I do think the Fed is now using the s&p as a guide to policy much more than they used to and I think Scott and others has been important in driving that ideological shift (toward Market Monetarism). The slow down in 2015/early 2016 and the speed up this year (in particular this week) from the fed followed big falls (gains) in the market even though core data (jobs, pce) didnt change much. Also worth noting that higher rates wont start to dint valuations for another 1-200bps based on historical analysis. Id be interested to hear your thoughts on how the market/economy reacts to much higher rates, how that is achieved (eg fed jamming short rates higher, or them letting it run hot and steepening the long end), and what the USD will do (noting its basically flat this week despite a big rise in 2y yields). Cheers

  11. Gravatar of engineer engineer
    3. March 2017 at 13:47

    Hmmm…it is funny how the efficient markets hypothesis goes right out the window when explaining the best rally in 25 years.
    Lets be real, the Democrats are so afraid that pro growth policies might mean some rich people get even richer, or that that building pipelines may make fossil fuels cheaper, that they would rather talk about secular stagnation. The Keystone pipeline will probably never by built, but there are dozens of natural gas pipeline projects that have been stonewalled that will have a much more significant impact. Two trillion in overseas money could have a significant impact. Some relief from Dodd-Frank might have a significant impact. This rally is based on pure fundamentals as far as I can see. I’m sure it would be even higher if Trump wasn’t well you know Twitter in chief…

  12. Gravatar of James Alexander James Alexander
    3. March 2017 at 14:23

    Higher interest rates will boost bank profits, banks say so. Investors agree. It’s not the bank deregulation story so much.

  13. Gravatar of Matthew Waters Matthew Waters
    3. March 2017 at 14:41

    “Hmmm…it is funny how the efficient markets hypothesis goes right out the window when explaining the best rally in 25 years.”

    Who are you arguing against? Certainly Scott doesn’t deny the EMH. He would be the last person to do so. I’m not the biggest fan of the EMH, but I see the rally justified by fundamentals as well.

    What Scott says, correctly, is that an increase in the stock market is not necessarily an increase in societal well-being. Lower corporate and capital gains taxes is mostly a transfer from shareholders to the general public. I’m not saying lowering corporate taxes is *all* a simple, zero-sum transfer. But the effect of lowering corporate taxes is more nuanced than simply pointing to the stock market.

    Same with less bank regulation. “Some relief from Dodd-Frank” means lower capital requirements and less oversight of risk management and other processes in banks. Ideally, the banks’ commercial paper and repo holders would be on the hook for letting banks leverage themselves. 2008 and *many* other banking crises shows that this doesn’t happen, for a variety of reasons.

    IMO, allowing commercial paper and repo losses also requires some way to break through the zero-lower-bound and to do so quickly in response to sharply declining demand like Sep. 2008. At the very least, the mentality of the Fed would need to be dramatically different to embrace unorthodox policy quickly. BTW, Trump’s possible Fed picks such as Taylor could have led the country to a Great Depression if they were in charge in 2008.

  14. Gravatar of Matthew Waters Matthew Waters
    3. March 2017 at 14:45

    Also, I think the effect of Trump on the fossil fuel sectors is very minimal. For oil and gas, upstream and downstream are depressed by a very bad 2015 for oil prices and then crack spreads. I invested recently myself in a refiner (though, per the EMH, I have most of my savings in index funds).

  15. Gravatar of JP JP
    3. March 2017 at 15:58

    “PS. How bad have things gotten? Trump’s defenders will claim that his staff was lying about a possible amnesty for illegals, just to sort of mess with the press. Yes, we’ve reached the point where calling Trump a liar is considered a defense of the man. ”

    Not really sure what this is about – if it were the “news” before the quasi-SOTU speech, isn’t the most plausible explanation someone in the media just made it up? All those “news” can be tracked to a single CNN journalist that has in the past published stories that were eventually proven to be complete fabrications. E.g. the bizarre Nancy Sinatra story mentioned here:

    Second, is that a signal things have gotten bad? How do you compare it with, say, the past administration “eco-chamber” wrt Iran deal? (I assume you’re aware of Ben Rhodes statements basically bragging about how they manipulated the press to do their bidding). Seems hardly extraordinary.

  16. Gravatar of Ray Lopez Ray Lopez
    3. March 2017 at 16:21

    I disagree with people who say the president has no effect on the economy. His policies do matter, and I recall talking to people who lived through the Great Depression who say FDR’s “fireside chats”, which coincidentally started around March 1933, at the trough of the bank crisis, had a morale boosting effect. This helped break the bank panic that had paralyzed the economy. A certain S. Sumner thinks devaluing the gold dollar had a similar effect, but I guess we’ll never know, since the two factors were coincident and one factor is confounding with the other.

  17. Gravatar of Major-Freedom Major-Freedom
    3. March 2017 at 17:10

    This blogpost:

    [Blah blah blah blah

    Haha, CALLED IT!:

  18. Gravatar of Major-Freedom Major-Freedom
    3. March 2017 at 17:15

    “But keep in mind that this was all priced in the day after the election.”

    No it wasn’t, because investors could not know beforehand just how much themselves and other investors would value the stocks in the future. The Trump election is not just about his winning on election day.

    It also everything that comes with his victory, the pro-business executive orders, policies, meeting with CEOs, unions, leaders, having listening sessions, all of this contributes to stock market valuation, which cannot be predicted beforehand on election day.

    As more and more investors develop positive expectations about the future, as they learn over time, that contributes to stock market valuation.

    Your contrived “equilibrium” models of stock pricing ignores what actually motivates investors over time.

    I guessed that Steve F’s question from yesterday would be answered with stumbling and fumbling. Sumner is becoming too predictable.

  19. Gravatar of Benjamin Cole Benjamin Cole
    3. March 2017 at 17:36

    I hate to bring up the topic of, you know, imonetary policy, but the Fed is promising a string of interest rate hikes.

    With inflation roaring ahead at 1.7%, I suspect Scott Sumner is on board with Janet Yellen.

    We need a post on this!

  20. Gravatar of E. Harding E. Harding
    3. March 2017 at 17:50

    Sumner, what do you think of the new regulatory reform bills recently passed by House Republicans?

  21. Gravatar of Matthew Waters Matthew Waters
    3. March 2017 at 19:09

    Yeah, it’s crazy rate changes are so breazily accepted. Both Core PCE and regular PCE are below 2%. In practice, the Fed has targeted around 1.7% core PCE, with range of 1.5% to 2% ceiling. There is a lot of interesting graphs at this link:

    There’s a bunch of crazy stuff about NGDP futures on thus blog and proposals for cashless society elsewhere. And that stuff IS interesting. But why isn’t there wide agreement for just 2% PCE level targeting?

    The rush to increase rates until such a level is achieved has no economic justification. Of course, banks and investors long for a return to “normal” interest rates of 5% while somehow still having 2% inflation. This is as sound economically as a high minimum wage or a rent ceiling. Just because investors want 3% real rates doesn’t mean they will happen. But the overwhelming pressure for higher rates does get the Fed and all other central banks to prematurely raise rates.

  22. Gravatar of Major-Freedom Major-Freedom
    3. March 2017 at 20:44

    Did anyone else notice that Sumner just had to include words in this blogpost to the effect that Sumner can also cause the stock market to go up?

    He cited Matt Yglesias for a reason, and that reason seems to be that he is so envious of Trump, that he needs to portray his own self as at least as good as Trump, if not better. Here is Trump, a billionaire, now leader of the most powerful nation on Earth, that has got to make Sumner go insane on a daily basis, so he engages in these daily reaction formation exercises, as catharsis.

    When Sumner praises others, it is always fake and insincere. He doesn’t actually believe anyone in the world is truly superior to him in a visceral way, but rather occasionally just luckier from time to time in making arguments he agrees with that he would prefer to have said himself.

    People say Trump’s election is the main reason the stock market is reaching record highs? Bah! That is exaggeration, after all, ignoramus leftist Matt Yglesias is saying the same thing about Sumner, right? Hahahaha

  23. Gravatar of James Alexander James Alexander
    3. March 2017 at 23:59

    If you want to know what Market Monetarists think of current US monetary policy, best to go here:


  24. Gravatar of Bob O’Brien Bob O'Brien
    4. March 2017 at 00:32

    “I’m passionate because I’m flabbergasted that other people don’t see that he’s obviously a buffoon.”

    I think many people like me, who voted for Trump, do see that Trump is a buffoon. We just think this buffoon is better than the corrupt and obviously insincere pack of democrats lead by HRC.

    On the other hand, I am flabbergasted that so many people voted for a buffoon in the primaries when there were some reasonable alternatives.

  25. Gravatar of bill bill
    4. March 2017 at 04:44

    Go back to the Fox News tapes from Feb 2009. Tons of coverage on “Obama’s Stock Market”. Fox realized that Obama had no effect on the stock market some time in March 2009.

  26. Gravatar of ssumner ssumner
    4. March 2017 at 14:37

    engineer, You said:

    “Hmmm…it is funny how the efficient markets hypothesis goes right out the window when explaining the best rally in 25 years.”

    It’s funny that people who don’t have a clue as to what the EMH says feel a need to waste their time commenting here, making a fool of themselves.

    Bill, Good point.

  27. Gravatar of Steve F Steve F
    4. March 2017 at 21:18

    Could the “Trump rally” be double, or triple, or sextuple the very big rally it already is and the EMH have anything to say about Trump?

  28. Gravatar of foosion foosion
    5. March 2017 at 03:10

    This WSJ column suggests another disconnect between the market and the economy.

    Due to declining antitrust enforcement, existing companies are better able to garner market power and fend off competitors. This is good for those companies (the benefits of oligopolistic pricing), but not a good sign for the economy.

  29. Gravatar of ssumner ssumner
    5. March 2017 at 10:12

    Steve, You can believe whatever you want to believe, just don’t confuse it with the EMF. Eugene Fama would laugh at people that claimed every up and down in the stock market was a referendum on the President. Yes, Trump’s probably had some impact on stocks, likely in an upward direction. But that’s all the EMH can tell you. We don’t know whether he’s raised stocks by 2% or 10%.

    For years I’ve been blogging about the EMH, assuming readers understood the theory. My mistake.

    Foosion, Good point. But I don’t think it’s antitrust so much as government created monopolies via intellectual property laws. What’s the point of antitrust when you have governments creating monopolies via patent laws?

  30. Gravatar of engineer engineer
    5. March 2017 at 10:16

    “It’s funny that people who don’t have a clue as to what the EMH says feel a need to waste their time commenting here, making a fool of themselves.”

    Perhaps I read your post a bit too quickly and attributed your explanation of the stock market gain to…”I’ve never seen such a dramatic case of mass self-deception in so many otherwise intelligent people in my entire life. ” Which to me does not seem to jive with EMH and the intelligence of crowds vs. individuals. But, no I’m certainly no expert in the EMH…hence my name “engineer”.

    In either case, you are right… I waste entirely too much time reading your blog…I’ll try not to make that mistake again…If I thought you were looking for an echo chamber like most people these days…then I wouldn’t read it at all…

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