President Donald Trump loves to boast about the performance of the stock market since he took office. The Dow Jones Industrial Average rose 24 percent in his first 11 months in office. The problem: It rose 29 percent during Barack Obama’s first 11 months.
Back then, the country had avoided a second Great Depression and Obama was greeted with widespread goodwill and confidence. But other factors were also at work.
Most important: The Federal Reserve cut interest rates to near zero and vastly expanded the money supply, while applying extraordinary means to reverse the economy’s freefall, such as buying up toxic mortgage bonds. This left plenty of money in the hands of the rich, who sought returns in a low-rate environment. Among these were stocks in good companies, as well as real-estate investments in healthy markets such as Seattle.
Secondly, most companies that entered the Panic of 2008 in good shape remained that way after the recession. Unlike 1929, the crash that led to the Great Recession, this time few major companies were mortally wounded. Investment opportunities in stocks abounded. From 2007 to 2009, the Dow had declined, rather than crashing as in ’29 and 1987.
That’s not to say Trump didn’t bring a certain mojo. Investors hoped that he would slash regulations and that certain industries, especially fossil fuels, would benefit. The very wealthy will have more money to play with thanks to the Republican tax bill. But Trump was also handed a strong economy from Obama, with Wall Street in a long bull market. Also, every day’s market result comes from millions of decisions, many now driven by algorithms and high-speed trading.
Yet the stock market is a highly dubious yardstick of the overall economy. A working paper from Professor Edward Wolff of New York University shows that less than 14 percent of households directly owned stocks in 2016. A little more than 35 percent indirectly own shares through mutual funds, 401(k)s, etc. And nearly 51 percent of households own no stock at all. American households owning stocks has been on the decline since the early 2000s.
One can argue that rising stock prices help ensure employment because companies are doing well. But it cuts both ways: Wall Street applauds and share prices rise when companies slash employment. In any event, stock prices tell us what investors think of the profit prospects of companies. Anything beyond that is greed — or fear, if the market turns into a correction.
And one is overdue.
Today’s Econ Haiku:
‘Admiral on the bridge’
Heard at Port of Seattle
Ship shape may follow
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