President Donald Trump is obsessed with the stock market. He has tweeted about it nearly every week since July, giving himself credit for the market’s booming performance this year.
“With the great vote on Cutting Taxes, this could be a big day for the Stock Market - and YOU!” he tweeted Monday morning.
Indeed, the Dow Jones Industrial Average was up 57.91 points and closed at 24,289.50 Monday. The DJIA sat just under 20,000 when Trump took office. It has been on a bona fide tear since his win – it rose 257 points the day after his shock election as chances for tax reform made investors confident.
But while Americans and business leaders are glad to give Trump credit for the stock market’s success, they are loath to say he has changed the economy for the good.
A recent survey by CNBC of a panel of CFOs found that most believe the stock market is rising because of Trump. But more than half said he deserves no credit for the decline in the unemployment rate, which has dropped from 4.8% to 4.1% since he assumed office.
Seventy-eight percent of Americans said in a recent Quinnipiac University poll that Trump’s policies are not making much of a difference or hurting their personal finances even though 72% in that survey said the stock market is doing excellent and a majority said Trump is responsible for its performance.
There’s good reason for Americans’ reluctance to closely tie less than a year of stock market gains to the state of the economy or their finances. Past research has found that over a long time horizon, GDP growth and long-term economic health are not correlated with short-term stock market performance. (For the record, the GDP has also been strong during Trump’s year in office.) The prevailing view among mainstream economists about the tax reform bills debated in congress is that they will lead to larger payouts to shareholders, sending stocks up, even if modest or low wage growth follows.
When does a President deserve credit?
There are even bigger problems with giving one President all the credit for a stock market rally in the first year of their term. The economy does not reset itself on inauguration day every four or eight years, waiting for the next president to roll in and start Tweeting self-praise. Instead, a president’s effect on the economy can take years to go into effect, usually lasting after their term is over.
“Presidents take way too much credit for the economy in general, and it’s not at all clear that they’re responsible for economic outcomes in their first year,” said Brendan Nyhan, a professor of government at Dartmouth College.
The problem of trying to give credit for the economy to a president this early becomes obvious after looking at an exhaustive review of the post-War economy by Princeton University professors Alan Blinder and Mark Watson. Their report found economic performance was better by almost any measure under Democratic presidents.
But their findings came with one major, deal-breaking caveat. “Democrats would no doubt like to attribute the large (Democrat-Republican) growth gap to macroeconomic policy choices, but the data do not support such a claim,” they write. Instead, Democrats can mostly thank “good luck” with a touch of “good policy” for their success.Conservative critics took things a step further. They latched onto the study’s small share of praise for Democratic presidents, arguing it didn’t accurately measure the contribution of Republicans and proposing a new methodology for connecting presidents with the economy.
Timothy Kaine, a fellow at the conservative-leaning Hoover Institution, took issue with the way Blinder and Watson used a “one quarter lag” as the point to begin measuring a president’s economy. In other words, only after one quarter of a new presidency passes did Blinder and Watson begin to give credit for the economy to the new president. Kaine did not think that made sense. “Why does Blinder and Watson lag the presidential term by one quarter, instead of none?” he says. “Why not two, four, or six?”
Kaine proposed an alternative way to give credit to presidents that he calls an “overlapping” approach. It phases credit out from predecessor and in to the new President as more time in office passes.
Kaine provides two formulas for how it could work. Using the first, two-thirds of the economy today would be attributable to Obama, making Trump responsible for one-third. Using the second, Obama becomes responsible for 70% of the economy today. Trump is responsible for 30%.
So if you are trying to say a President is responsible for the economy today, not only do you have to assume that pure luck is probably the greatest single driver, but more than two-thirds of the economy’s performance should be considered the success of the prior President. This, on top of the fact that the stock market is not the same thing as the economy.
Fewer lower income Americans have stocks
That leads us to the question as to why Trump is making such a big deal out of the stock market.
Trump styled himself during the election as the “the middle-class growth candidate.” But his favorite measure of economic success, the stock market, is not very popular with the middle class – or with Americans in general.
According to Gallup, “it appears the financial crisis and recession may have fundamentally changed some Americans’ views of stocks as an investment.” Less than one-third of families in the bottom half of the income percentile own stocks, according to the Federal Reserve.
More stocks are owned by foreign investors than by the lower half of the US income spectrum. About 35% of stocks are owned by foreign investors, according to the Tax Policy Center. All told, only about half of families own stocks, part of a downward trend. Eleven percent fewer Americans own stock now than they did before the Great Recession, Gallup found.
The exception to this decline is among wealthier Americans and older Americans. Gallup found that Americans with more than $100,000 in household income per year own 1% percent more stock than they did before the recession. They found older Americans also own 1% more stock.
Even still, Trump now says he plans to use the gains in the stock market as part of his campaign messaging for 2020. “It’s called ‘How is your 401(k) doing?’,” he said at a fundraising event this weekend.
That messaging may – like Trump’s tax plan – be less popular than he imagines.
Recent CNN polling on tax reform suggested Americans were nervous about the tax reform proposals considered by congress. Instead they favor focusing on policies middle-income Americans participate in, like the the Child Tax Credit. They tend to dislike policies that favor the wealthy, like abolishing the estate tax. In general they tend to be worried about declining wages – not the stock market – and to list the general health of the economy as a top concern. 401(k)s, the Federal Reserve found, are most commonly used by the top 10% of earners. They are not used as often by the young or minorities.
On top of these polling realities, Americans remain lukewarm, if not slightly disdainful, toward the banking sector after the recession. According to Gallup, banking remains less popular than most industry sectors in the economy.
The one thing the stock market is for Trump, though, is a win. At least for now, whatever the politics, it’s one bright spot amid an otherwise historically unpopular presidency.