It’s the Economy not the President
This past week saw another new record for the S&P 500 leaving many to question how long this rally can continue. At the same time, Trump’s presidency has been increasingly volatile and newsworthy. Betting websites currently have the odds of Trump leaving office before the end of his term at about 50%. At the same time, the odds of the largest additional economic benefits proposed by Trump, such as business and personal tax cuts and increased infrastructure spending are decreasing. Yet, year to date, the S&P is up over 8% leaving many clients with the question, “How is this possible?”
Many are surprised to learn how little the President of the United States has to do with the performance of both the economy and stock market. Indeed, many economists joke that voting in one’s local election is likely to have a larger impact on your day to day life than voting for the President. This was certainly true for me recently when a local vote approved full day kindergarten. Dr. JoAnne Feeney wrote about the lack of influence a president statistically has on the US economy in a previous commentary. Many responded with surprise, but the reality is that the President simply doesn’t have that much influence. There are checks and balances in place to help mitigate dramatic changes. An economy as large and diverse as the US also has tremendous momentum and is exceedingly complex and dynamic. Even a President with full party support, as the current President has experienced, can find it quite difficult to execute changes that are material relative to the other economic forces and momentum.
Even if the President had the ability to execute significant changes, the political climate is likely to change quickly, since midterms almost always swing against the president’s party. Using data back to 1922, if the midterm election is compared to the presidential election just 2 years prior, on average there is a 7.5 percentage-point swing against the president’s party. In fact, the president’s party only gained ground twice, in 2002 and 1926. This country repeatedly votes for balance.
Regardless of the drama coming from the White House on the political front, economic data and earnings have both been strong, while inflation has remained tempered, factors highlighted by Charles Lieberman’s opinion piece published by Bloomberg today. While the market P/E is somewhat above average, interest rates have rarely been so low and strong growth in corporate profits have resumed. Low interest rates help to fuel growth by providing cheap capital. While we expect higher interest rates, until rates move up significantly, something the market is not currently anticipating, higher market multiples are justified.
Earnings growth has also remained strong. First quarter earnings increased almost 14% and estimated earnings for 2018 are forecast to climb almost 12% more. The world, too is improving. Europe continues its slow and steady climb. Emerging markets are generally doing well.
All told, despite what appears to be a President causing a fair bit of Washington drama, the economy continues to truck along. This goldilocks combination of low interest rates, moderate economic growth, low unemployment rate, improving international conditions, and most importantly double digit earnings growth have justifiably driven the market higher.
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