The Dow Jones industrial average crossed the 20,000 mark Wednesday. Yawn. These round-number milestones are totally arbitrary.
Look past those zeroes, though, and there is an interesting question: Why have markets soared since Donald Trump’s election?
That’s not at all what experts predicted; fear, uncertainty, and recession were the chief expectations.
Instead, a Trump bump.
Is that a sign of unexpected faith in Trump’s economic stewardship?
Or something more like irrational exuberance?
Start with that first possibility, that markets are up because the future looks bright, regardless of what the chattering classes say about the dangers of a Trump presidency. Markets have their own kind of wisdom, based on the best assessments of millions of individual investors.
Right now, those investors seem bullish about the Trump era. And really, that shouldn’t be so surprising, given that many of Trump’s top economic priorities are also longstanding business favorites: deregulation, corporate tax cuts, reductions in the income tax rates paid by the wealthiest Americans.
Add to this Trump’s recent executive orders to advance two pipeline projects and his broader plan to fix infrastructure and you can understand why investors might be bullish about the future.
All the pieces are in place for a stimulative, business-friendly agenda designed to boost corporate profits. And remember, that’s really what investors care about most. Not the health of the economy as a whole, but the growth and future profitability of businesses.
The Trump administration should open lots of new opportunities for profit. The Dow’s 0.8 percent rise on Wednesday, which pushed the blue-chip index up nearly 156 points to 20,068.51, was fueled, in part, by Boeing Co.’s strong earnings. And since Election Day, there have been big gains for deregulated investment banks (Goldman Sachs Group is up 30 percent) and construction equipment makers (Caterpillar Inc., plus 16 percent).
There’s just one problem with this interpretation:
It leaves out everything else about Trump, including his temperament and all the wildly unorthodox proposals that would never show up on a traditionally conservative, business-friendly wish list.
And you can’t just leave these things out, because they could have big economic consequences.
Between Trump’s continuing commitment to erect new trade barriers, his willingness to bully companies that seek opportunities overseas, and his widespread conflicts of interest, it’s hard to deny that his presidency carries some substantial and unpredictable economic risks that would undoubtedly affect the profitability of US companies.
So why aren’t those risks being reflected in stock market valuations? Especially since the market has been steadily moving up since 2009, a long bull run that should be ripe for correction.
If there’s one lesson from the financial crisis of 2007-2009, it’s that markets are particularly bad at dealing with what’s called “tail risk,” meaning events that are highly unlikely but potentially devastating.
And with Trump, there’s a lot of tail risk. A trade war with China. A crackdown on immigration that hurts hiring. Civil unrest. Impeachment.
None of these things are likely, but they all seem far more likely under Trump than they have been in decades, even generations.
And that’s a hard thing to incorporate into a stock quote.
In the end, then, there are two ways to think about the continuing run-up in US stocks:
The market knows more than the punditocracy, and the pro-business side of Trump’s agenda really does outweighs all the rest.
Or investors are setting themselves up for a big fall when risk becomes reality.