After cheering the market’s relentless rise, Trump is forced to face the reality of Monday’s swift and historic fall.
President Donald Trump is learning a basic and painful lesson of Wall Street: Stocks also go down.
A global market sell-off accelerated Monday with the Dow Jones Industrial Average plunging nearly 1,600 points at one point in roller-coaster afternoon trading. After a volatile session, the Dow ended down 1,175 points, or 4.6%, at 24,346.
It was the largest ever single-day point drop for the Dow and it rattled both Wall Street and Washington, abruptly ending a remarkable period of placid markets where it often seemed the only direction was up. A young generation of Wall Street traders has never seen the kind of whipsaw action that seized markets Monday.
While the point drop was the largest, Monday’s decline did not rival some of the bloodiest days in Wall Street history given how fast the Dow has raced ahead in recent years. On Oct. 19, 1987, the notorious “Black Monday,” the blue chip average gave up nearly 23 percent of its value. On Sept. 29, 2008, in the depths of the financial crisis, the Dow sank nearly 7 percent.
But it was still a large and shocking decline. It arrived amid growing concern that an economy juiced by a massive corporate tax cut, and already at full employment, could overheat and require forceful action from a new and untested Federal Reserve chairman — installed by Trump — to cool things down.
On top of concerns about rising inflation, the tax cuts are already increasing the federal government’s need to borrow and accelerating the date by which Congress must raise the federal debt limit. And as of Monday, there was still no plan in Washington to raise the limit and avoid a catastrophic default.
The result is that a president who tossed aside traditional presidential caution in cheerleading the stock market now stands poised to take the blame for any correction.
“This is a risk that the president clearly set himself up for,” said Charles Gabriel of Capital Alpha Partners, a Washington research firm. “Until now, Trump’s had kind of a free ride in this market and taken so much credit for it, even though so much of it was due to easy-money policies from Janet Yellen and the Fed. Now she’s out the door and volatility is back.”
Jerome Powell, the new Fed chair installed by Trump and sworn in Monday, is not expected to deviate sharply from Yellen’s gentle approach to raising interest rates. But he is a lesser-known figure on Wall Street.
And if the recent jump in hourly wages gets pushed up even more by corporations handing out bonuses and pay bumps in the wake of the tax bill, the Fed may be forced to move faster to fight inflation — offsetting the economic benefits of the tax cuts.
Interest rates are already rising as the government discloses it will have to ramp up borrowing in 2018 to make up for revenue lost to the tax-cut bill. Higher rates on government bonds make stocks look less appealing. They also can make it harder for businesses and consumers to borrow and spend, possibly slowing the economy.
On top of all this, stocks blew past traditional valuations as they raced ahead in 2017 and early 2018. A widely followed ratio designed by economists Robert Shiller and John Campbell that compares stock prices to corporate earnings hit 34 this year. The historic median for the ratio is 16.
This could have served as a warning to Trump not to associate himself too closely with a rally that looked tenuous to many Wall Street analysts. Instead, Trump bragged about the gains at every opportunity on Twitter and even in his State of the Union address.
“The stock market has smashed one record after another, gaining $8 trillion in value,” Trump said in his address to Congress.
Last week’s decline alone wiped out nearly $1 trillion in that value, according to S&P Dow Jones Indices.
Trump has regularly boasted on Twitter that the stock market rise, which actually began in 2009 at the end of the last recession, is the direct result of his policies on taxes and regulation.
“Business is looking better than ever with business enthusiasm at record levels. Stock Market at an all-time high. That doesn’t just happen!” he tweeted last August.
The latest declines left a White House that has basked in the glow of the market rally scrambling to explain away the massive decline and calm frayed investor nerves.
“The President’s focus is on our long-term economic fundamentals, which remain exceptionally strong, with strengthening U.S. economic growth, historically low unemployment, and increasing wages for American workers,” White House Press Secretary Sarah Huckabee Sanders said in a statement. “The President’s tax cuts and regulatory reforms will further enhance the U.S. economy and continue to increase prosperity for the American people.”
Stocks are still far higher than they were when Trump took office, but the return of sharp volatility — and the possibility of further declines — has now put Trump in the uncomfortable position of being directly associated with daily market moves.
“Presidents historically haven’t commented on the stock market anywhere near as much as President Trump has,” said Ed Yardeni, market analyst at Yardeni Research Inc. “I think Barack Obama said something in 2009 about how he thought stock prices seemed low, and that was about it. So he obviously likes to take credit for the positives. Now what does he say when the market suddenly goes down?”
So far, Trump has not weighed in publicly on the market declines. A White House official sent a statement to CNBC on Monday expressing concern over the drop. “We’re always concerned when the market loses any value, but we’re also confident in the economy’s fundamentals,” the statement said.
Both the U.S. and global economies are in fact on stronger ground than they have been in years, leading many Wall Street analysts to suggest that the current bout of selling represents something of a healthy correction to stock market valuations and not the beginning of a bear market.
Unemployment in the U.S. is low, corporate profits are strong, and growth in the first quarter is currently running as fast as 5.2 percent, according to the most recent estimate from the Atlanta Fed. Europe and Japan are also growing, a kind of synchronized global expansion not seen in recent years.
“Corrections of 5% to 15% occur on average once a calendar year,” Jason Pride, director of investment strategy at Glenmede, wrote in a client note Monday. “Further, history has shown the market capable of making it through such corrections and going on to positive returns for the full year period, particularly in cases of ongoing expansions.”
The market may indeed quickly reverse course in the coming days and go on to move higher over the course of the year, allowing to Trump to start bragging again and possibly aiding Republicans in their efforts to tout the tax-cut bill and limit potential losses in the midterm elections.
But significant risks lie ahead in Washington. The biggest is whether Powell and the Fed can navigate a difficult path between allowing the economy to thrive and wages to rise without letting potentially crushing inflation take hold. And if Powell and his colleagues decide they need to pump the brakes hard, that could leave them in direct conflict with a president not shy about criticizing people he himself put into office.
And it could leave Trump with regret about jettisoning a Fed chair whom Wall Street came to love. “For the past four years, Yellen was the fairy godmother of the bull market,” said Yardeni. “And now that she’s gone, maybe we don’t get the fairy dust anymore.”