As Hallowe’en approaches, Americans are tricking and treating. But what is the US stock market doing?
The smiling economists of 1700 Pennsylvania Avenue
At its AGM in Washington last week the IMF reported that the global economy was humming along nicely with every region of the global economy set to record GDP rises for the first time this decade. Last year, the global economy grew by a disappointing 3.2 percent. This year the world is on track for 3.6 percent growth and 3.7 percent next year. China is likely to grow the fastest at 6.8 percent, surpassing India’s 6.7 percent.
American companies that sell most of their product overseas are expected to do best this year. The IMF urged American policymakers to use the upswing to reduce debt and to spend more on infrastructure and training. But the White House has other things on its agenda apart from the economy…
Weirdness in the White House
Did Secretary of State, Rex Tillerson, really call the President of the United States “a moron” last week? Of course, Mr Tillerson, a genteel Texan, denies it. But the President was stung enough to vaunt his own intelligence quotient to Forbes Magazine – citing as interconvertible evidence of his cerebral superiority the fact that his uncle was a professor. Mr Trump then declared the matter “fake news”.
The incident underlined the emerging differences between the two men. According to the Washington Post, Mr Trump is frustrated by what he sees as Mr Tillerson’s traditionalist worldview – in contrast to the President’s desire to redefine America’s role. According to USA Today[i], 56 percent of Americans approve of maintaining the deal with Iran that the president has just put in doubt – and it is thought Mr Tillerson is among them.
As I reported back in August, the peacemakers between the White House and the State Department are White House Chief of Staff, (General) John F Kelly and Defence Secretary (General) James Mattis. They stress the importance of good order at a time when the North Korea question is looming larger – and Mr Trump is planning an important trip to China and other Asian countries in early November.
Senator Corker (Republican, Tennessee) even described the White House as an adult day care centre. Mr Trump responded furiously – but Washington insiders claim that Senator Corker has more friends in Congress than Mr Trump.
And then the entire Republican old guard went on the attack. First, veteran Senator John McCain. Speaking to the National Constitution Center in Philadelphia on Tuesday night (17 October) which had bestowed on him an award, the Arizona Senator deplored half-baked, spurious nationalism cooked up by people who would rather find scapegoats… Mr Trump pledged to fight back.
The former president George W. Bush and his retinue think that Mr Trump has “besmirched” the presidency.
More significantly, George W Bush came up for air (43rd President of the USA – remember him?). At a speech in New York on 18 October, Mr Bush said: We have seen nationalism distorted into nativism. He continued:
Bullying and prejudice in our public life sets a national tone, provides permission for cruelty and bigotry, and compromises the moral education of children… The only way to pass along civic values is to first live up to them.
This cannot be seen otherwise than as a direct attack on Mr Trump’s presidency by a former President of the same political party. As such, it is being taken in America as – depending on your point of view – an astonishing breech of protocol, or a warning to Mr Trump that the Republican establishment will not put up with his impoverishment of the office of President much longer. According to the Los Angeles Times, the former President and his retinue (and remember the Bush clan still have clout) think that Mr Trump has “besmirched” the presidency[ii].
Meanwhile, over the last week all three of America’s major stock market indices (the Dow-Jones IA, the S&P and the NASDAQ) have reached record highs. On 17 October the Dow surpassed 23,000 (intraday) for the first time in its 121 year history. As Mr Trump tweeted last week, since his election the DJIA is up nearly 25 percent, the S&P up nearly 20 percent and the NASDAQ up nearly 27 percent. The Trump Bump is now the most sustained stock market rally for 85 years.
Some analysts claim that the mere presence in the White House of a business-friendly President with a taste for personal and corporate tax cuts and deregulation has buoyed the markets. But the truth is that the economy has powered ahead of its own momentum this last year. All recent economic indicators have been positive, though non-farm payroll was impacted negatively due to recent natural disasters – even if workforce participation increased. In September, the percentage of all Americans who were in employment reached a record 60.4 percent. In that month alone, the number of people working full-time increased by 245,000. And – in stark contrast to the UK – average hourly wages have grown by 2.9 percent over the last 12 months.
But some market analysts are beginning to wonder if this is all too good to be true. The suspicion is that this is a market driven by hope – the hope that something will get done in Washington. One analyst[iii] wrote to clients last week that tax euphoria could break soon. The fact is that the margin for error in the Senate for a far-reaching tax reform bill is perilously thin. Congress is worried that deep tax cuts will severely worsen the budget deficit.
Goldman Sachs has signalled a 65 percent probability that some substantial tax package will get through Congress by early 2018 – in which case it reckons the S&P will put on a further 2.5 percent. In contrast, the IMF is talking about “significant policy uncertainty” in the US and has cut its forecast for US growth for this year (2.2 percent) and next year (2.3 percent).
A question of interest
The outlook for interest rate policy at the Federal Reserve will be determined in the coming months by the identity of the Fed chairperson from February next year. On 19 October Ms Yellen met with Mr Trump at the White House to discuss the possibility of her serving for a second term. But if she wishes to reapply for her job, she is just one candidate amongst several.
Other candidates include former Fed Governor (director) Kevin Warsh, current Governor Jerome Powell, Stanford University economist John Taylor, and National Economic Council Director Gary Cohn. Mr Trump “interviewed” Mr Taylor on 11 October and Messrs Warsh and Powell late last month.
Mr Trump has criticised Ms Yellen in the past but has also indicated that he wants interest rates to remain low.
Mr Trump has criticised Ms Yellen in the past but has also indicated that he wants interest rates to remain low. Many Republicans on Capitol Hill have accused the Fed of being too slow to raise rates after the financial crisis was over. They think it should be subject to greater congressional oversight.
Mr Trump can best be described as unengaged on monetary policy. Last week he proclaimed that the national debt had been more than wiped out by the rise in value of the stock market under his tenure. It is quite difficult to know whether that statement reveals astonishing economic illiteracy – or an audacious vision of how deficits might be funded in the future.
The future of Trumpery
The book that is the talk of Washington right now is One Nation After Trump – A Guide for the Perplexed, the Disillusioned, the Desperate and the Not-yet-Deported by a trio of American pundits[iv] who have previously mapped out the degeneration of American politics into its current malaise. They regard Mr Trump as a “deeply flawed demagogue” who “has no business being President”.
They argue that Mr Trump neither invented the fake news defence, nor the pro-active use of conspiracy theory; but rather he took these malign arts to new heights. Republican leaders created the conditions for Mr Trump to emerge and then lost control, like Dr Frankenstein, of the monster that they had created. Now Mr Trump is eating alive the party he purports to lead.
Even Americans who agree with that diagnosis, however, will tell you that Mr Trump was preferable to the alternative candidate – who offered no understanding whatsoever of the travails of Middle America. Moreover, the bedrock support bases of both the Democratic and Republican parties are in long-term decline as American society becomes less associative and more atomised. No doubt this process of atomisation is being accelerated by the prevalence of social media. Atomised voters, so the authors claim, are more likely to support authoritarian leaders.
Mr Trump’s most earnest supporters mutter under their breath about the President’s Twitter habit – but they know that there is nothing they can do about it. Some hoped that the gradual nomination of more technocrats to still vacant posts might bring a more wholesome discipline to the White House machine. But, in his Forbes interview, Mr Trump announced that he wasn’t going to fill the hundreds of empty posts – because America didn’t need them.
Even the Alt-Right which propelled Mr Trump to power seems to have turned against the Donald. Steve Bannon, the power behind Breitbart News, who was Chief Strategist to Mr Trump until leaving the White House staff on 18 August, said on 10 October that Mr Trump has only a 30 percent chance of reaching the end of his term. He thinks that the forces arraigned against Mr Trump will align to trigger the famous 25th Amendment to the Constitution, by terms of which the US cabinet can vote the President out of office if they believe that he is mentally or physically “impaired”.
Mr Bannon apparently thinks that the 25th Amendment route is a more likely outcome than a formal impeachment by Congress. But the 25th Amendment has never been invoked in the history of the United States; and, according to a constitutional expert I spoke to, would open up a can of worms. Knowing Mr Trump as we do, he would probably have his entire cabinet declared insane.
Mr Bannon apparently thinks that the 25th Amendment route is a more likely outcome than a formal impeachment by Congress.
Some say that Mr Trump will be succeeded by another celebrity – Mark Zuckerberg’s name is conjured; but the founder and CEO of Facebook (NASDAQ:FB) has time on his side. Vice President Mike Pence is said to be prepared to step forward if duty calls; but even those who detest Mr Trump do not regard a Pence presidency as a satisfactory solution. The Democratic-leaning New York Times asked recently Do We Really Want Mike Pence to Be President?
If, as a sympathetic alien, I might make one suggestion: it is that Hillary Clinton should abandon any lingering hopes she may have to run again for President and should make way for younger blood.
But almost every day there is another faux pas, another controversy, another bullying tweet, another segment of American society offended. Just this last week Mr Trump has offended the families of fallen veterans by claiming – incorrectly – that President Obama never took the trouble to phone them.
Are the US markets immune to Trumpitis?
Watching US TV daily these last weeks, reading American newspapers and talking to ordinary Americans, it is impossible not to escape the feeling that the Trump administration is slowly but steadily shedding any credibility it may have been credited with last January. And even then, it was surely out of a sense of patriotism. Even a right-wing media outlet like Fox News (owned by 21st Century Fox (NASDAQ:FOXA)) regards the President as a figure of derision. Fox spends most of its energy, of course, refighting the last Presidential election campaign by demonising the Clintons. Revelations about the Clinton-supporting Harvey Weinstein have been luridly and frenziedly broadcast this last week.
And yet corporate America remains in fine fettle – with no storm clouds on the horizon. (As I shall be explaining further in the November edition of the MI magazine). A hike in interest rates will probably do more good than harm – think of the interest income on those corporate cash piles. And, even if the package of tax reforms proves underwhelming, as I suspect it will, that will do corporate America no harm. The economic fundamentals are essentially robust.
Of course, there are significant geopolitical risks in play – as I have discussed elsewhere – not least the game of nuclear cat and mouse with North Korea; but the markets have no way of pricing such risks into their valuations and assume, like Candide, that such things will not happen in the best of all possible worlds.
I therefore conclude that, for this moment in history at least, American business and Washington politics have become almost entirely de-coupled. The US stock market, barring any outlier events, will probably continue to power further upwards, despite rather than because of Mr Trump – even if or when his authority declines to almost nil.
Non-Americans should remember that what goes on in Washington is only of marginal interest to the great American public – who pay more of their taxes to their City and State Governments than to the Federal Government. Washington can be a source of funds for infrastructure projects in fast-growing states like Colorado; but all the planning initiatives are taken locally. State gubernatorial elections, like the close-fought one currently underway in Virginia[v], can be more illuminating than presidential ones.
America is much bigger even than Mr Trump’s ego – and the markets know that. I’ll go for Treat.
[i] USA Today, 17 October 2017, page 6A.
[iii] Chris Krueger of Cowen Washington Research Group – reported in the Washington Post, 11 October 2017.
[iv] EJ Dionne (of the Washington Post), Norman Ornstein and Thomas Mann.
[v] Virginia is not entirely typical because, alone amongst the 50 US states, Governors may not stand for a second term there.