Authers’ Note today sounded downright exasperated with the President’s tweets. Trump claimed credit for the fastest 1,000 point gain in the Dow’s history:
That’s too cute by half. Each 1000 percent gain gets mathematically smaller as the Dow goes up; eg, the move from 10,000 to 11,000 is a 10 percent move whereas that from 24,000 to 25,000 is just 4 percent. Properly compared, the performance of the Dow under Trump lies between equivalent periods in Obama’s two terms.
But the Dow is a stupid aggregate of stocks for the simple reason that it is price-weighted. “Over the past year,” Auther notes, “two great industrial giants have been the alpha and omega of the Dow: Boeing has doubled, gaining $85bn in market cap, while GE has collapsed by more than 40 per cent, shedding a staggering $118bn. But due to the ridiculous way in which the Dow is calculated, Boeing accounts for a rise in the Dow of 1,064 points, while GE accounts for a fall of only 84 points.” That’s because Boeing has 600 million shares outstanding valued at $309 each for total market cap of $184 billion; while GE has 8.7 billion shares worth just $18.5 each for a total of $161 billion. The differential sensitivity of the index is an artifact of the practically irrelevant question of how many shares the firms have outstanding.
If we ignore the Dow and look, as all serious investors and analysts do, at the S&P500, even Obama’s 1st year in office comes out ahead of Trump’s.
In a more longer term perspective, the Trump rally hardly stands out either.
More generally, Presidents have little influence over the stock market; central banks much more so. But we should not even exaggerate the influence of the latter. Stock valuations are sky-high not just because of monetary accommodation but mostly because the near-term global macroeconomic outlook is especially positive for risk assets. Not only is global growth more robust than it has been in a decade; there is little sign of inflation, which implies that there is little incentive for central banks to take away the punch bowl any time soon. It is this benign macro environment that is compressing market-wide risk premia.
Investors are facing two main risks in the near term. The first is that growth may falter and cash flow expectations may need to be marked down, with attendant corrections in asset valuations. In the extreme, the economy may even plunge into a recession; although that scenario seems unlikely in the near term—the yield curve may be shallower than before but it is still sloping upwards. The second is that inflation might finally show up, forcing the Fed to hike much faster than anticipated, thereby precipitating a risk-off. In other words, markets have been in a sort of Goldilocks Zone. Either a significant deceleration in global growth or a significant acceleration that eliminates global slack can precipitate a sell-off.