According to U.S. President Donald Trump, the stock market should be 10,000 points higher than it is today if not for the Federal Reserve not acting to support its growth enough.
Whether or not people think Donald Trump is sufficiently qualified or suited to be President of the United States is to a large degree a matter of personal opinion. Whether he’s qualified and suited to be the Chairman of the Federal Reserve is quite another story.
Based upon the remarks that he has made about the stock market of late, and especially considering his latest belief that the stock market should be 10,000 points higher if the Fed did their job in supporting it better, Trump has really shown his hand as a real neophyte when it comes to the worlds of banking, finance, and economics.
The very fact that he referred to the fact that the “stock market” should be up this much is very telling in itself, as only those with virtually no familiarity with stock markets would ever refer to the Dow Jones Industrial Average as the stock market. It’s one of them, and not a particularly broad one either, comprising only 30 stocks out of the tens of thousands that are traded in U.S. stock markets.
This is not to say that movements with the Dow aren’t indicative of broader overall trends, but given the weighting of such a small number of stocks that are included, issues with just one of them can have us stepping away from broader trends. The recent instance with Boeing, a Dow component, is an example, with the Dow underperforming broader indexes such as the S&P 500 during the times that Boeing has faltered.
For the most part though, the major stock indexes in the U.S. do move together pretty closely, and that is due to their being driven by the same overall market forces. Many people think that a stock’s price is indicative of its business performance, but most of what drives stock prices has nothing to do with the company but instead is related to the changing mood of the market overall.
The biggest gaffe that Trump made with these comments is his thinking that the primary role of the Federal Reserve is to promote stock market gains, and this isn’t even one on their list. They actually manage something even more important, the economy itself, and specifically, the money supply of the economy, which is what drives it.
Most people think that the Federal Reserve is just another branch of government, which would place it under the thumb of people like the President or Congress, but the Fed is an is an independent body. There are some very good reasons why this is necessary. While some do realize that the Fed is separate from the government, they tend to often see them as just a gang of bankers who aren’t elected and should not be given so much power, perhaps even claiming they a tool of the Illuminati or other secret society of powerful people that some believe rule the world for their own gain.
Thankfully, the Fed isn’t Influenced by Politics or Amateurs
The remarks of Trump hit home with the importance of this independence in a very striking way, and those who have an appreciation of what the Fed does should shudder at the prospect of Trump or one of his minions making decisions on our economy essentially out of sheer ignorance.
It’s not clear where Trump got this estimate of the 10,000 Dow points, but this is a rather fantastic amount over just 3 years, in addition to our actual gain. This would be well beyond what would ever be possible under any circumstances, as the Dow cannot double in value in just 3 years. To appreciate just how overblown this number is, we need to have an understanding about what actually puts stock prices up.
The actions of the Fed certainly influence this, but only to a certain point. The way this actually boosts stock prices, or puts them down, is how their actions affect the mood of the stock market. When the mood is good, this means that more people will be likely to buy stocks and those who are looking to sell them will be less likely to do so, and this causes prices to rise.
We can think of this on a linear scale, from the best to the worst. Even in the best of moods though, the market is limited by how much more money that they are willing to invest in stocks, and it takes a lot of money indeed to put the Dow up by 10,000 points.
The Dow has in fact risen by 10,000 points since Trump became president, and while he would like to take the credit for this, and may be responsible for some of it at least, the mood has been on the high end of the scale, as the bull market that had been running for 7 years already really came into its heyday over this time. 10,000 points in a little over 3 years is a phenomenal move up, indicating that people’s outlook has been very positive.
Could we have increased this so much that we could have seen this number doubled? It’s hard to argue that if the Fed had kept rates at zero throughout this time we wouldn’t see a bigger one, but this was already close to the biggest we could have expected, and was actually even better than what we saw during the years when the Fed rate actually was zero, and quantitative easing was at an extreme level.
Trump Surely Realizes He Has No Say Here, But Another Agenda Makes Sense
We also need to take into account the additional inflation that would have been created if the Fed continued its all-out expansionary policies as Trump would have hoped. Whatever gain in stock prices that we would have seen would be offset by inflation by great deal, if not entirely. Meanwhile, those who hold their money in other asset classes such as bonds and savings would have paid a similar price and had their wealth devalued by this extra amount, and the net effect would have been one of net shrinkage of wealth overall rather than net expansion.
Trump makes it clear that he is against quantitative tightening, and seems to prefer as much easing as possible, but this sort of thing affects the bond market much more than it does the stock market, since this involves the Fed either buying or selling bonds depending on the effect it desires.
Interest rates do move stock prices quite a bit, but more so than it would be reasonable for them to do so, and this effect is more a matter of how it changes investor sentiment than its affecting stock prices from a fundamental level. Sure, earnings tend to be better with lower rates, but not to the extent that the players in the stock market give it credit for, if we took away this effect on sentiment and left the fundamentals to decide it all.
It’s the investors who decide what weighting to give to changes in earnings growth in the first place, which is just one of many factors that influence stock prices, and the biggest one by far is how much more money that is flowing in or out of the stock market. These inflows and outflows are influenced by a number of things, with both the market overall and with particular stocks, and the correlation with earnings is actually a pretty weak one.
Therefore, Trump’s estimates are simply not even close to realistic, even though some voters may mistakenly see sugar plumbs dancing in their heads like a child on Christmas morning, with Trump playing the role of Santa Claus. They also may want to vote for Santa in 2020, which is what this appears to be all about. Look at how stocks have gone up, Trump wants them even higher, give us another 4 years of this at least.
The Federal Reserve does not exist to promote stock market growth though, at all. If they are executing their duties properly, they may have to take action that is very unfriendly to these markets, and in particular, raising interest rates or refusing to lower them. Their goal is not to play Santa, but to play Goldilocks, and their sole goal is to have our economy not too hot, not too cold, but just right.
Trump’s remarks qualify as pure fantasy all around, including the magnitude of his estimates, the proper role of the Fed, and the fact that the government has any real say in any of this. A lot of people will read or hear all this and perhaps get more excited about voting for the man though. This might be sheer madness to those more in the know, but considering that the vast majority of Americans may know even less than Trump does about this, there may be a method to his madness after all.