At its close on Friday, the Dow Jones Industrial Average was 1% lower than it was on Jan. 20, 2017 — President Trump’s inauguration. That’s not good news for Trump or the rest of us. But another way of looking at it is that it took a global pandemic to wipe out the gains from the economic policies of the past three years.
That the Dow Jones Industrial Average went up is only mildly interesting, that it has fallen equally so. It’s just a number after all. Except that numbers from markets and prices are information to the rest of us. Here, the varied indices are the best available vote on how current policies and events are going to affect the future economy. This is known as the efficient markets hypothesis.
For the education of those fresh out of a grievance studies major, this does not mean that markets are the efficient way of doing everything, nor even that efficiency is the desired goal of every action. It’s only that markets are efficient at processing information. The insight being that, sure everyone’s got an opinion, just like we all have a fundamental to sit upon. But using votes, or Twitter, or shouting matches (to the extent those last two differ) to determine what that agreement is suffers from a problem: too much noise from those with no skin in the game. In a market, by definition, everyone is using their own assets to lay out that opinion. That you’ve got to pay to play means that everyone does express what they really believe, not just what is fashionable or polite.
Markets and their prices are the aggregated opinion of everyone, even those too undecided who then stay home and don’t take part. It’s entirely true that we might not like the results we get from this exercise, but that market price is, in those mere numbers, the best estimation we’ve got of what we all believe (averaged out, of course).
The Dow is thus unimportant in that sense that it’s a simple number about the value of a handful of stocks. But the changes in it are the collective estimation of us all as to how the future is going to turn out. A rising market means that we all, on average, think that policies and events are going to lead to a richer world. A falling market means the opposite. Which is an important enough referendum on events and policies, no?
Which leads us back to that judgment on the policies of Trump. The market rose strongly as a result of them for three years. That means that we all, collectively and en masse, decided that they were going to lead to that better world where there is greater wealth to share. Since that’s what the very idea of having an economy is for, making us better off, this seems like a positive vote in favor of those Trump economic policies.
We can also run this backward. We know that the pandemic is going to make us poorer. Our information number is signaling the same point. We’ve just done a little checking of the validity of the efficient processing idea then. But note that corollary: A falling market is telling us we’re getting poorer, a rising one, therefore, is telling us the opposite. Policies that lead to a rising market are exactly what we want, for we do all want to be getting richer.
As I say, we might not like the information that markets present to us after they’ve done that efficient processing of the data. But it is still true that the collective evaluation of the Trump administration’s economic policies, as measured by those prices, is that they were good for the economy — significantly so, to the point that it took a disastrous pandemic to outweigh their effect.
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at The Continental Telegraph.
