Wall Street’s enthusiasm for a business-friendly president backed up by a Republican Congress was so intense in late 2016 that markets coined a new term just to describe it.
The so-called “Trump trade” was a bet that, as president, real-estate mogul Donald Trump would succeed in loosening growth-stifling regulations and cutting taxes, ushering in an American economic renaissance. The S&P 500 surged 25 percent in steady gains between Trump’s surprise victory on election night and the end of his first year in office.
By the time the blue-chip Dow Jones Industrial Average reached an all-time high near 27,000 in late 2018, however, the run-up had begun to sputter. Volatility, largely absent in 2017, returned with a vengeance as interest rates rose and unpopular White House trade wars tarnished the previously gilded Trump trade.
Unfazed, the president reinforced his confidence in his own strategy on Twitter, while blaming market volatility on the Federal Reserve, which he said was raising interest rates too quickly.
When the Fed moved ahead with its fourth 25-basis-point increase of the year on Dec. 19, without indicating when it might pause the series of hikes, the market hiccuped again. And reports that Trump had begun asking advisers whether he had the authority to fire Fed Chairman Jerome Powell over the higher rates, rather than allaying market concerns, merely worsened them, since such a move would undercut the central bank’s reputation as an independent guardian of the American economy.
“Market participants don’t like uncertainty,” Fred Cannon, director of research at New York brokerage Keefe, Bruyette & Woods, told the Washington Examiner. The lack of direction from the Fed about the pace of future rate increases increased that uncertainty, and the president’s statements about the Fed “added to the confusion,” he said. “At the end of the day, markets like the structure of the economy with an independent Fed.”
By Dec. 24, the worst Christmas Eve trading day in U.S. history, the Dow had tumbled 19 percent from its record of 26,828, as traders discounted an assurance from Treasury Secretary Steven Mnuchin via Twitter that Trump had never asked about firing Powell and a statement from acting White House chief of staff Mick Mulvaney on ABC’s “This Week with George Stephanopoulos” that the president didn’t believe he “had that authority.”
A separate statement from the Treasury Department that Mnuchin had consulted with the heads of the six biggest U.S. banks and that they all had ample funds for lending — an apparent attempt to halt the market’s swoon — had the opposite effect, as it addressed a concern investors previously didn’t have.
The two incidents, along with Trump’s refusal to end a government shutdown by compromising on his demand that Congress approve $5 billion to build a wall along the U.S. border with Mexico, “put the economy at risk,” said Jaret Seiberg, an analyst with Cowen Washington Research Group, which has tracked federal policy for the past four decades. “All three incidents are unforced errors.”
Mnuchin’s statement, which also covered plans to meet with the President’s Working Group on Financial Markets — a panel that includes the Fed, the Securities and Exchange Commission, and the Commodity Futures Trading Commission — was the biggest surprise, Seiberg noted.
“This is the type of announcement that raises the question of whether Treasury sees problems that the rest of the market is missing,” Seiberg said.
Indeed, traders who weathered the financial crisis — when an imploding housing market ultimately brought down investment bank Lehman Brothers and forced the government to bail out other lenders — tend to think that “when somebody says there’s no liquidity problem, there probably is,” Cannon explained. “The Treasury statement was clearly not helpful.”
Banks themselves, remembering crisis-era market behavior, declined to comment on the Treasury statement altogether, and Trump himself sought to reassure investors about market stability.
The Fed “is raising interest rates too fast because the economy is so good,” he told reporters on Christmas Day. The U.S. unemployment rate held steady at a nearly 50-year low of 3.7 percent in November, a third-quarter survey of corporate leaders by the Business Roundtable showed historically strong confidence in the economic outlook, and holiday sales hit a six-year high.
Still, Trump hopes the Fed refrains from further increases in the near future: “I think that they will get it soon, I really do,” he said.
In the meantime, normalized interest rates, which are still only 2.25 to 2.5 percent, “are a form of safety” after seven years of near-zero interest, the president continued. Now, people who have money in traditional savings accounts “get interest on their money,” he said. “For a lot of years, nobody got any interest on their money.”
While Democratic congressional leaders Sen. Chuck Schumer and Rep. Nancy Pelosi lost no time blaming Trump as the market sank the week before Christmas — accusing him of “plunging the country into chaos,” in part through a “personal war on the Federal Reserve” — the president said he’s optimistic about the country and its businesses.
“We have companies, the greatest in the world,” he said. “They’re doing really well, they have record kinds of numbers. I think it’s a tremendous opportunity to buy, really a great opportunity to buy.”
Investors concurred: The Dow rallied 1,000 points to 22,878 when markets reopened on Dec. 26.
“We can have political volatility without a major downturn in the market, as long as there are no economic effects,” Cannon said.
