President Donald Trump tried his hand as an equities analyst Wednesday morning,tweeting that “in the ‘old days,’ when good news was reported, the stock market would go up. Today, when good news is reported, the stock market goes down. Big mistake, and we have so much good (great) news about the economy!” Does the president make a smart point?
Trump is likely referring, of course, to the positive economic signs in Friday’s jobs report — showing low unemployment and accelerating wage growth — paired with the drop in stock prices in recent days.
Why didn’t good economic news help the stock market?
While there is still some disagreement about exactly why the market pullback occurred, several logical explanations have emerged. These include the rise of risky investment vehicles that can trigger volatility, rising bond yields, overly high stock valuations and — most saliently — investor fears that wage growth (along with tax cuts and an infrastructure package) could accelerate rising prices. The problem with price inflation is that it could prompt additional interest rate hikes from the Federal Reserve, which in turn could hurt stock performance.
In other words, even though Trump is perhaps correct to connect the “good news” to the drop in stock prices, there’s a case that the market’s reaction was rational. Arguably the real “mistake” is for stock prices to climb too far and fast — and it might be a healthy thing for small market corrections to occur, as investors adjust their economic expectations, get ready for a new Fed chair and pare down risk generally.
Is this stock market behavior normal?
As for Trump’s second point — about the “old days”? Whether he’s right might depend on your definition of “old.”
At least since the financial crisis (aka under President Barack Obama as well) it has actually been a common theme for signs of an improving economy to stoke fears of rising interest rates and lower stock prices, as Albion Financial Group chief investment officer and chief economist Jason Ware told USA Today.