Trump Bump is down but not out after stock rout – USA TODAY

This post was originally published on this site

CLOSE

“Because of me.” Time

Before the recent market swoon, President Trump gushed about the record-setting rise in stock prices following his election, claiming it as proof his economic policies were working.

But after the worst week for the Dow Jones industrial average since early 2016, the so-called “Trump Bump” has hit its first major bump in the road. 

Last week, the president weighed in on the recent tumult that has sparked the first 10%-plus dive in stock prices in two years, despite an economy and corporate earnings that are on the upswing due, in part, to tax cuts and business deregulation he has pushed through since taking office.

In a tweet, Trump basically said Wall Street has it all wrong: “In the ‘old days,’ when good news was reported, the Stock Market would go up,” he posted.  “Today, when good news is reported, the Stock Market goes down. Big mistake, and we have so much good (great) news about the economy!” 

The Dow seemed to prove the president right on Monday, barreling 410 points higher.

The market’s recent turbulence raises the question of whether the stock rally that kicked off on Election Day back on Nov. 8, 2016, and which was gaining speed up until two weeks ago, is still intact.

Question: Have the stock gains since Election Day been erased by the sell-off?

Answer: The correction has chiseled away at the big gains, but it’s nowhere near a complete wipe-out. While the Dow Jones industrial average is 7.6% below its Jan. 26 record high, it’s still up 34.2%, since Trump was voted into office. That means an investor that invested $10,000 in the Dow on Election Day would now have an account balance of $13,420. The Dow would be well into bear market territory, and have to fall 31.1% from its record close to get back to where it was on Nov. 8, 2016.

More: A year into the Trump presidency 401(k) balances are looking good

More: 401(k) investors stock market “correction” survival guide

More: 401(k) at risk? What 3 stock market skeptics see ahead

Q: Is Trump correct in saying that stocks should go up because the economy is in good shape?

Answer: Yes and, um, no. Many Wall Street pros agree with the president, noting that the strong underlying business conditions should remain strong, thanks to less regulation, tax cuts and robust government spending. The catch is that too much of a good thing for the economy can be bad news for stocks, which are priced on current not future conditions, says Bruce Bittles, chief investment strategist at Baird. How’s that? If the economy becomes overheated, it could prompt the Federal Reserve to raise interest rates more aggressively, which is akin to a car applying the brakes to slow its acceleration. The Fed’s benchmark short-term rate is currently pegged at 1.25% to 1.5%, after being close to 0% since the 2008 financial crisis.

Q: What’s the biggest risk facing stocks right now?

Answer: Anxiety over what happens in the bond market. The risk is two-fold, but both are related to rising rates. One worry is that the economy could overheat and worker wages could spike because of all the stimulus of tax cuts and government spending on things like infrastructure. That scenario would cause interest rates to go up faster and quicker than forecast. Higher borrowing costs will slow the economy and make credit more expensive for businesses and consumers. The second risk related to bonds is if yields rise high enough, they will make bonds a more competitive investment option compared with stocks. Investors, for example, might be attracted to a 3% yield on the 10-year Treasury note and take money out of the stock market and put it into bonds. 

“For nearly a decade with rates near zero, stocks were the only game in town, but now there is a bond option” says Tom Block, a Washington policy analyst at Fundstrat Global Advisors in New York.

Q: Did Trump err when talking up the stock market?

Answer: Wall Street pros say the president should keep his thoughts about the stock market to himself.

“Trump looked naive when he tweeted that ‘the markets are making a big mistake’ by selling off,” says Gregory Valliere, chief global strategist at Horizon Investments. “His bragging about market gains didn’t help him much with his core supporters, many whom hate Wall Street.”

CLOSE

The S&P 500 is up 21% since Election Day. Time

 

Read or Share this story: https://usat.ly/2nURnJU