President Donald Trump takes economic indicators seriously, except when he doesn't. He's boasted that recent stock market highs endorse his leadership; before the election, he said it was all a bubble. In the same way, before he took office, low unemployment was a phony number that meant nothing; now it's a sure sign of success.
In general, stock-market performance is a poor measure of presidential prowess. Still, the president raises interesting questions. Why have U.S. shares done so well since the election, and is there more to come?
If you were smart enough to know the answers, of course, you'd be smart enough not to say. Still, two big factors have lately been at work: the Federal Reserve's evolving view on inflation and interest rates, and investors' opinions about how much good or harm the Trump administration might do to the economy. The second point suggests that Trump deserves a share of the credit for the run of recent months -- just as he'll deserve a share of the blame if and when the market crashes.
Of the two factors, monetary policy has been the main thing up to now. Investors are wondering whether the Fed is altering its plan for getting interest rates back to normal. Unemployment is low, yet the labor market isn't tightening as you'd expect. There's a remaining pool of so-called discouraged workers that could be drawn back in, helping to offset pressure on wages. Labor costs aren't accelerating appreciably and inflation is still under target.
All this might delay the Fed's efforts to normalize monetary policy. Much of a delay would be a mistake, but that's not the point. If the Fed is hesitating to raise interest rates, that helps justify the current mood of optimism. It also pushes down the dollar, which boosts the foreign earnings of U.S. companies.
The Trump factor also contains a rational component. For investors, the paralysis in Washington is roughly neutral, because actual policy out of Washington could go either way: Up to a point, no news is good news. Meanwhile, the Trump presidency increases the possibility of lower corporate taxes, and Trump's officials have begun to roll back economic regulation where they can. It's still unclear what this assault on regulation will amount to, or how far the changes will be smart policy, but compared with the status quo it's likely to be good for profits.
Commentary on 08/15/2017