If the president and his party are smart, they’ll bring their economic rhetoric back into line with the interests of their base.
It was never hard to discern why Donald Trump talked about the stock market. When it suited him, correlation and causation were the same. Equity prices were rising, which gave him something to brag about. But it was always ill-advised to hitch the presidential wagon to Wall Street’s star, and not just for the reason that Trump had little to do with its rise: Markets are fickle beasts, and eventually, the record run was bound to end.
And so it has. On Friday, the Dow Jones Industrial Average fell 666 points, while the Standard and Poor’s 500 fell 2 percent, capping off its worst week in two years. Credit markets took a hit, with the ten-year bond yield — which moves inverse to its price — jumping to 2.8 percent, its highest level since 2014. The slide continued Monday, as the Dow fell a whopping 1,176 points and the S&P 500 fell 4.1 percent.
The two-day drop is certainly significant, but it comes after a ten-year run of rising asset prices. As investor Ray Dalio writes, it is more of a “minor correction” than a harbinger of a depression. Though the bull market of the 2010s coincided with a sustained economic expansion, it was also supported by Federal Reserve policies of low interest rates and quantitative easing. This year, investors expected a certain level of tightening by the Fed, now led by Jerome Powell, which is reducing its balance sheet and says it will raise rates three times in 2018. But they are now beset by “justifiable fears that the Fed will tighten faster than is priced in,” as Dalio puts it.
The Fed normally raises interest rates when inflation is rising to stop the economy from overheating, and investors are beginning to see inflationary pressures emerge. Though inflation has consistently come in below the Fed’s 2 percent target, January’s jobs report provides reason to believe that will change. The jobs report shows just 4.1 percent unemployed and 200,000 jobs added in January. More important, it shows that tight labor market finally bearing fruit in the form of robust wage growth: Wages grew at a 2.9 percent year-over-year rate in January, the fastest pace in eight years. You don’t have to be an economist to figure out which president looks good in light of that figure.
But investors see rapidly rising wages as heralding the late stage of the business cycle: They are linked to rising inflation. And higher interest rates, frequently a response to inflation, make it more expensive for companies to borrow thus reducing their profits. As economist J. W. Mason writes, “faster wage growth has translated one for one into rise in labor share of income” rather than causing inflation — for now. Still, Dalio’s hypothesis makes intuitive sense as an explanation for the market correction (though other factors have certainly contributed to the market action, such as a collapse in the value of short-volatility trades, which several investors had large positions in).
Back when the stock market was humming, Trump’s need to take credit made for an odd spectacle: a would-be populist president talking up the rise of asset prices rather than, say, the growth of wages. As the leader of a GOP stuck between a message ostensibly aimed at working-class voters and policies that are tailored toward the wealthy, he may have been doing his best to elide the gap. But it didn’t quite work.
The current stock-market plunge, then — caused as it was, at least in part, by strong wage growth — could actually teach Trump and his party a valuable lesson: It’s a much bigger deal to most Republican voters if their wages are rising than if the equity price of the company they work for goes up. This is especially true of the Trump voters who consider him their tribune against so-called elites. The newly volatile market should encourage the president and his backers to talk more about sunnier measures such as wage growth, and bring the party’s rhetoric into alignment with the interests of its constituents. Whether an aesthetic change in messaging will cause the party to rethink its policies, however, is a separate question.
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— Theodore Kupfer is a William F. Buckley Fellow in Political Journalism at the National Review Institute.