The Trump Effect on the Stock Market

2018-03-29T16:33:33+00:00

Every presidential election creates speculative movements in the market that are historically predictable. Republican candidates are typically viewed as business friendly. Democratic candidates, on the other hand, are usually perceived as corporate pests.

When the dust ultimately settles though, Republicans who make it into office often don’t end up being as pro-business as they are usually given credit for. And Democratic presidents aren’t usually as much a hindrance to big-business as the media would lead you to believe. The political stereotypes tend to be little more than hot air. This is largely because a president’s impact on the marketplace has far more to do with the legislation they are passing than their party affiliation.

In the case of Donald Trump, we had a Republican presidential candidate whose pre-election personal and business track record inspired encouraged predictions of a business savvy administration. In many ways, the analysis of Trump’s impact on the economy begins and ends with his pro-business profile. That simple and convenient tagline tends to steer most people away from critically analyzing his actual effect on the market. A critical analysis would set aside Trump’s political party affiliate and his business experience (whether you think he was a good business man or not) and instead focus on his real-life actions as president.

No News is Good News

As a general rule, mature and effective markets prefer not to deal with complex economic legislation. Even if its application is sound and its goal is legitimate, markets get cranky in the short-term. As Ken Fisher writes in “Beat the Crowd,” stock markets in highly-developed countries thrive during periods of legislative gridlock. In other words, when politicians are all talk and no action, the stock market tends to do well. Ironically, the general public is often outraged about the lack of political activity even as stocks soar.

This is because the stock market behaves like an efficiently working organism competing in a chess match. If you make a dramatic change to the rules midway through a game of chess, it will cause confusion and unpredictability. The more complex the rule change, the more difficult it is for the chess players to maintain their efficiency.

The same goes for economic markets. When complex economic legislation is passed, investors will begin speculating about who will be affected and how they might react. Needless to say, when new rules are applied to an already complicated game, mature large-scale markets usually aren’t happy.

What Type of Legislation Do Markets Approve of?

In the short and long term, the stock market responds well to straightforward legislation that simplifies economic systems. Simplifying the tax code, eliminating minimum wage requirements, and easing the process for small business start-ups are all examples of legislation that make the game of chess easier for the market to play.

Are Republican Presidents Good for the Market?

Again, party affiliation does not make a shred of difference in how the market behaves. Politically speaking, it’s all about what’s happening. To illustrate this, let’s take a look at the following chart depicting market returns after the Great Depression:

Trump effect on stock market

Source: Investopedia

Contrary to popular opinion, returns during Democratic administrations have far exceeded returns during GOP regimes. Despite this data, even Democratic economists conclude that there is actually no underlying relation between the presidency and the stock market.

In case you think this data is meaningful, consider 2008 when former President Obama was handed the keys to the Oval Office just as the housing market was on the brink of total collapse. The data in the table above doesn’t go past the year 2000, but if it did the Democratic numbers would be negatively affected despite no specific wrongdoing by the Democratic Party. Examples like this are sprinkled all throughout American history.

Now that we’ve established that party affiliation has nothing to do with a president’s effect on the market, let’s look at what President Trump has been up to.

President Trump’s Effect on the Stock Market

At the time of writing, Trump is in the second year in office. During his first year, President Trump signed 117 bills into law. Though this sounds like heavy hitting law-making, it was really gridlock in disguise. There were about 15 laws passed merely to undo Obama-era legislation. Another 45 laws made minor changes to existing legislation. Many of the other pieces of legislation were incredibly minor in nature (e.g., renaming monuments).

Overall, most economists viewed the lack of groundbreaking changes during Trump’s first year in a positive light. Even while we experienced the market’s ideal gridlock during year one, we still expected something big on its way since most presidential four-year terms are front-loaded with major moves during the first couple years.

So here it is – the scary tariff.

Trump’s Tariff

President Trump’s tariff on steel and aluminum was maligned not only by the media, but also by his top economic advisor. After passing his tariff into law, financial pundits started throwing around buzzwords like “trade wars” and “industry suffering.”

Though the average American doesn’t fully understand tariffs, buzzword media professionals were able to convince over 69% of Americans that the new tariff would hurt our economy. Before vilifying this new legislation, there are two questions we should ask: (1) What problem is this legislation supposed to solve? (2) Is this legislation a reasonable method for achieving that solution?

Only after asking and answering those questions can we begin to contemplate how the legislation will impact the market.

Before we answer that question, let me give you a little information for context. Currently, the United States produces the fourth most steel of any country on an annual basis. In 2017, the US produced roughly 80 million tons of steel. Supplementing its own production, the US imports another 36 million tons from other countries. Compare this to the total amount of steel exported globally (473 million tons), and Trump’s tariff appears unlikely to actually start a trade war.

Economists project our imported steel will only account for 6-7% of all traded steel in 2020.  Furthermore, steel company representatives have responded to the new tariff in a dismissive manner, contending that it won’t have a meaningful impact on their profitability.

So, is a trade war on its way? Probably not.

Now, let’s return to our two questions:

1. What problem is this tariff supposed to solve?

President Trump has not been known for his love of China and he doesn’t enjoy the near monopoly leverage China has in the steel industry. As of 2018, China produced over half of the world’s steel (831.7 million tons). As a result, China controls the market’s pricing. China’s annual growth last year was also a couple percentage points higher than that of the United States.

While Trump likely believes that “steel production is a vital factor in our national security,” he doesn’t not want China to control what America will pay for 40-50 million tons of steel in the coming years.

2. Is the tariff a reasonable method for achieving that solution?

First, the steel and aluminum tariff is highly unlikely to be the catalyst for a catastrophic trade war. Second, the insane amount of market control that China has over a crucial commodity is something worth addressing.

Whether this is the perfect solution or not, I cannot say. But, in my view, the end goal is consistent with President Trump’s current course of action.

Finally, tariffs are not etched in stone. In several years, if/when American steel production is bolstered by the tariff then it is highly likely that the tariff amount will gradual decline over time. This is not a brand new method of improving domestic industry and the world knows that.

A Few Final Thoughts

While nearly all economists agree that “the more global trade, the better,” President Trump’s tariff could actually be a reasonable measure that is lessened over time. As the US is the largest economy in GDP, Trump’s recent acts have created a minor blip during what has been a booming ten-year market run. As consumers and investors, we must understand that when we take the time to truly understand these isolated acts of lawmaking, it helps us realize that market efficiency will prevail in short order.

When complex and perhaps nonsensical legislation hits the market in rapid succession, we may then expect drastic changes as investors. But when at least moderately tactical law making comes to fruition followed by digestion periods for the market, we can remain calm and give the legislation its chance to have its effect. Markets are blind to party affiliation, civil rights, and newspaper headlines. What markets do care about is the laws being enacted and how they influence their chess match.

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About the Author:

Darian
Hi, I'm Darian! I am a twenty-something insurance professional working on my ultimate quest for financial freedom. I hope you enjoyed this article. Stick around to learn more about financial strategies to manage debt, save more, spend less, and live the life you want.

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