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The president clearly set himself up: Trumps stock market miscalculation

NEW YORK — President Donald Trump is learning a basic and painful lesson of Wall Street: Stocks also go down.

A global market sell-off that began Friday continued into Monday with the Dow Jones Industrial Average plunging more than 1,500 points in afternoon trading. After a volatile trading session, the Dow ended down 1,175 points, or 4.6 percent, at 24,346.

The big slide comes alongside 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 governments 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.

Trump bragged about the gains at every opportunity on Twitter and even in his State of the Union address.

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, Trumps 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 shes 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 Yellens 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.

U.S. President Donald Trump gave an address that Republicans called “normal” — a word rarely associated with a Trump speech | Chip Somodevilla/Getty Images

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 weeks 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 doesnt just happen!” he tweeted last August.

Other senior administration officials such as Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn have also tied the markets gains directly to Trump policy moves.

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.

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 havent 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. “Were always concerned when the market loses any value, butRead More – Source