The Market under Trump

Barack Obama tried throughout his administration to take credit for the stock market rising to the 18,000 level or so on the Dow Industrials.  A sign of a healthy economy, he insisted, and a validation of his ability to steer the economic ship that is the USA.

Of course, never once did he mention that the reason the market was where it was, and where it had gotten, had nothing to do with a healthy economy.  After all, we in the huddled masses were well aware that the economy was far from healthy.  Joblessness was terrible; so many people left the job market that the unemployment rate actually fell because people couldn't find work for so long they stopped being counted.

The economy was not healthy, certainly, but the Dow was peaking.  That peak had nothing to do with the economy, although it was definitely caused by Obama policies.  The Federal Reserve's push under Obama to push interest rates to near zero meant that saving money in banks and interest-bearing accounts was no longer worthwhile.  The only place where you could hope to get a return on investment was the market, and the higher demand for equities drove prices up.

That wasn't the only perverse relationship between Obama's policies and stock prices.  Obamacare made hiring employees far more expensive, so companies shed staff counts in favor of leaner head count, more skilled and more senior employees doing more -- five people doing the work of seven.  The savings made profitability deceptively higher.  The companies were more profitable, but the unemployed and underemployed part of the workforce reached heights not seen in decades.

This is critical to understanding what will eventually be the direction of the market in a Donald Trump administration, assuming he is able to move through a lot of his agenda with Congress led by his party.  Because, as I see it, there are two large forces at opposing sides that will have an effect.

These two forces reflect what (A) the removal of the Obamistas' debilitating policies does, and (B) what Trump's highly pro-growth policies will result in.

Think (A) for a second.  Imagine what happens when interest rates are allowed to tick up somewhat and banks possibly become a competitor to the market for investment dollars.  That's a downward press on equities, because demand for them is diluted by new, higher-interest accounts with rates we used to see.

Then -- when Obamacare is deleted and the cost per employee for health insurance becomes less onerous.  Will companies go back to more, lower-skilled employees?  I don't know.  There are facing-off pressures there.  Those firms that leaned-out their workforce in favor of fewer, better-skilled employees may have decided they like that option.  For them, the repeal of Obamacare will have little effect, because they've already changed their hiring model to accommodate it.  If the changed workforce concept was successful for them, they may continue it and their stock value may not change as much.

Trump, however (think (B) now), is looking at dramatically lower corporate tax rates, as well as the repeal of many onerous regulations.  That is essentially dumping money in the coffers of corporate America, allowing them to invest in research and development, as well as its associated hiring -- or simply capturing it as additional profit and returning some to shareholders.  The former would involve less net (and less stock price increase) than the latter.

In addition, his intent to tilt trade with foreign countries toward more favorable terms for the USA could also go either way -- higher prices from re-homed manufacturing can stall growth and depress stock prices if it's not offset by exports driven by more favorable negotiated terms.

Those who think they know are betting on better prices; the Dow hit 19,000 this week on the come.  But my questioning of how far up it really can go is less affected by what Trump will do than what Obama did do.  The market was heavily higher at the end of the Obama administration, but artificially so; there was nowhere else to put investment money.  It leads us to question how even an extremely pro-business president can push an already artificially high market higher.

We'll see.  I'm not selling out, at any rate.

Copyright 2016 by Robert Sutton
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