President Trump is no stranger to the world of investing, having used debt and leverage and intensely opportunistic investing to amass a multibillion-dollar net worth over a generation. His focus has always been on real estate, and while he has had some significant and high-profile busts (Atlantic City, most infamously), he has combined brand-marketing expertise with real-estate proficiency to create significant wealth for himself and his family.
What has not apparently been a significant part of his balance sheet over the years is the U.S. stock market. A May 2016 Federal Election Commission filing suggested that at that time he had less than 5 percent of his net worth invested in marketable stock securities. Subsequent reports have suggested that he divested even those holdings prior to the election.
So while President Trump is known as a wealthy businessman, he isn’t necessarily known for his stock-market prowess, which may be why investors basically ignored this exhortation from him in the first presidential debate last fall: “We are in a big, fat, ugly bubble. . . . If you raise interest rates even a little bit, [the stock market] is going to come crashing down.”
So investors and citizens alike cannot be blamed for expressing confusion over this tweet sent by the president this morning:
Stock market hits new high with longest winning streak in decades. Great level of confidence and optimism – even before tax plan rollout!
— Donald J. Trump (@realDonaldTrump) February 16, 2017
The reality is that the Dow Jones Industrial Average is up over 2,000 points since President Trump was elected, an increase of more than 11 percent in just over three months. The S&P 500 is up a comparable 10 percent in the same period. Much of this stock-market performance is most certainly attributable to the “animal spirits” excited for what President Trump has promised by way of pro-growth policies. From corporate tax reform, to deregulation, to repatriation of foreign profits, there is plenty for investors to like in the Trumpian policy promises. Looking at those potentially long-term realities, combined with the present cyclical tailwind of improving corporate earnings, one can see why stock prices have advanced as they have. So President Trump is not only right about what the market has done, but he also certainly deserves some large amount of the credit for the move of these last three months.
But as a professional money manager, I want to give some advice to President Trump: Be very careful defining the stock market as a bellwether of your overall success. There are a plethora of reasons President Trump should follow my advice and rethink tweets such as the one he sent this morning.
‐The memorialization of something forecast with stock prices can invalidate your credibility in the future. Consider the damage done to the reputation of former private-equity tycoon Steven Rattner, Obama’s “car-industry czar,” for this most unfortunate tweet sent just before the election:
If Trump wins, stocks would plunge but doubt that would bounce back as they did in UK post-Brexit https://t.co/6nRIGfRn80
— Steven Rattner (@SteveRattner) October 22, 2016
Rattner had a reasonable reputation in financial markets despite his far-left-wing ideology and his tenure with President Obama, but his reputation has suffered greatly since his market fear-mongering blew up in his face after the election. The risk–reward tradeoff of tweeting broad market forecasts is not attractive.
‐When President Trump touts the performance of the market, he demonstrates a certain degree of incoherence if not overt hypocrisy. If the market was in a “big, fat, ugly bubble” at Dow 18,000, what does that mean at Dow 20,500? President Trump could argue that the elevated prices are now justifiable because of his promised policy changes, but the raw numerical reality suggests that Trump is making market commentary by convenience.
Always and forever, stock markets exist to embarrass the greatest number of people the most amount of time possible.
‐Crowing about the stock market feeds a class-warfare stereotype of Republicans as caring only about the wealthy and Wall Street. The economic figure that will define the Trump presidency is GDP growth — period. President Obama gets little credit for a decline in the unemployment rate because credible economists know that it was a weak job recovery as measured by quality of jobs. Under-employment (a measure of those wanting full-time work but stuck taking part-time work) is still so high that, for objective observers, it skews the low unemployment rate. Because GDP growth was so woefully tepid throughout the Obama administration, his team has resorted to using stock-market growth to validate his economic legacy. Stocks are discounting mechanisms, reflecting all sorts of realities that may or may not mean something for the broad economy. In the short term, the signals from stock prices mean less. Longer-term stock-market growth is probably more significant. Jumping on short windows like this is risky, and it makes the president vulnerable to future criticism, whether or not stock prices continue climbing.
‐The Fed has not yet begun monetary tightening at any material level. History suggests that when fiscal forces are required to fight against monetary ones, troubling market volatility may result.
‐Always and forever, stock markets exist to embarrass the greatest number of people the most amount of time possible. It is one of the reasons that “contrarianism” (investing against the sentiment of the crowd) has been such a successful strategy for so long. It is one thing from your brother-in-law to get caught up with bad market timing; it is quite another for your president to do so.
In short, President Trump has in his toolbox a significant number of policy prescriptions that ought to be good for capital markets and even for the broader economy. Allowing those things time to take form, create results, and lift all boats in the tide of this economy will prove wiser and less risky than tweeting praise for short-term stock-market moves. Those of us who manage money for a living can attest to this!