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Today is a good day for a non-p-hacked evaluation of the stock market under Trump. I had discussed this with someone during the initial tariff chaos, and wanted to return to it at some point. That conversation ended up using euro prices due to worries about dollar inflation; in the following the brackets always show the data based on euros.
The day of the election, the S&P 500 made +2.5(+4.1)%, from which we can impute between -2.5(-4.1)% and -1.1(-1.8)% for a hypothetical Kamala win, depending on what odds we use for he election. Given the spirit of the exercise, I think we should use the prediction market prices for this, giving the second set of numbers. In reaction to the tariffs, it dropped strongly to a low point of -13.8(-15.4)%, on April 8(21), and after various takebacks recovered quickly to +3.1(+0.7)% on May 16(16). Since then it has shown a relatively linear increase, ending the year at +17.5(+11.1)%. Inflation that year was 3.0(2.1)%. Despite these seemingly similar inflation numbers, there is a significant gap in the final return, and its probably better to use the lower number.
Historically, annual returns were +10.5%, or +6.7% after inflation (those are for dollar only, the euro wasnt around that long, but probably irrelevant over those time scales). So going with the more pessimistic euro numbers, this year was slightly above average in total, or moderately below relative to the post-election price. I think we can take this mostly at face value; because expectations are priced in with stocks, there is much less risk that credit goes to anything that happened earlier, and I dont know what windfall looks like a linear increase. It doesnt seem like the market significantly misjudged Trump on election day.
The most interesting point here to me are the tariffs. Essentially since Trump revived this topic, Ive seen a never ending stream of takes about how very bad they are, an entirely new kind of economic terribleness, etc, and not a single one has claimed a numerical effect size. After asking around for one, the only thing Ive gotten is this, estimating GDP to be -0.6% in the long term based on policy in April (the have an update with more current policy to -0.35%). That seemed low, but from a non-trumpy source I figured thats probably a good sign. And it certainly seems in line with the numbers above now. Overall, I still think tariffs are bad for the economy, but it seems the effect size is still small relative to everything else going on, even with the drastic measures weve seen.
What most predictions about stocks and the US economy missed is just how enormous the tide of AI investment is for share prices and headline GDP growth. Also underappreciated is the extent to which spending is propped up by health care, etc., especially for the aging baby boomer cohort - how could we not see short term GDP with the deficit rising so explosively?
If you look at earnings, especially sales volumes, for companies with exposure to consumers, it is not very good! Additionally, it is important to keep in mind that pre-tariff inventory builds have made it so that tariffs have not yet truly filtered down to measured prices or earnings and will not do so untl 4q25 or 1q26.
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The models aren't accounting for rare upsets. What happens to the market if there is only one factory in the world that makes some component we never have heard of but is super critical for hospitals, food production or airplanes and that factory burns? What happens to the market if there is a major war and the electrical grid relies on spare parts from few places? Bringing production home reduces the risk of extreme downturns so even if the median return is lower the average return is higher due to a smaller risk of extreme negative outcomes.
I recently saw somebody posting his L on some trading forum. He shorted chicken fastfood in Korea, because he thought that the fundamentals of demographic crisis will impact that industry negatively. Then apparently the Nvidia CEO dined in some chicken restaurant in Seoul and it created fried chicken fad, boosting shares of chicken restaurants. He lost everything as he was forced to sell on his margin call.
A black swan event for fried chicken.
Hilarious.
Miser, miser! Modo niger et ustus fortiter!
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I definitely agree that this is a reason to not naively hope for raw "number go up." Other factors affect the overall resilience and robustness of the economy, and might go along with slightly worse numbers in the short term.
I'm certainly in favor of bringing production of certain critical infrastructure home, but have we done a good job of doing that over the last few years?
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If the US gov is trading a tiny economic impact in exchange for the national security and long term economic benefits of reshoring, I would consider that a win.
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I guess I would have two questions here:
My initial intuition is that in the real world you could have genuinely bad policies (say, New York doing rent control) being overwhelmed by all the positive economic trends in a society. Just because the numbers are going up, doesn't mean they wouldn't be even higher without the drag caused by bad policies like minimum wage, rent control, and, potentially, tariffs. Does your analysis account for this? If it does, could you please elaborate more how you distinguished the various possibilities involved? And if it doesn't, could you add analysis to this effect?
I mean it’s been 9 months. Any policies that the markets are reacting to are either Trumps or policies he chose to continue. I don’t think you can attribute much going on now to policies by Biden as he’s been out of office for nearly a year.
I think there's a lot of bad storytelling around the stock market in general.
I sometimes listen to the Wall Street Journal's Minute Briefing, and they always mention how the market did that day, and give an explanation for why it went up or down.
Their explanation is always plausible, but my basic issue is that if the stock market is generally just on a random walk, and you always grasp for the nearest plausible explanation, you're going to be completely wrong about why the market was up or down in a given day a lot of the time. Like, in the world where the market had gone slightly down, instead of slightly up and more or less the same news items had happened that day, how much does that change how they tell the story that day?
It’s not on a random walk, I think the issue is that the markets themselves are ahead of the news. To be blunt, by the time a market-pushing force becomes general public news, it’s long since been priced in. The people making a living from stocks are generally aware of what’s going on in the world from private sources— global intelligence agencies, government sources, knowing the players and the playbooks. I’d watch the markets to time the end of the shutdown rather than the opposite.
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To begin with, explaining market reaction is a less credible version of divination. Even things that should have a straightforward effect up or down are polluted by second, third, fourth, nth-order reasoning of frontrunning the reaction and frontrunning the frontrunners and turning positive news into a negative if it's not AS positive as the frontrunners assumed (or vice-versa), and etc...
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In general, I've found that the answer to whether the president causes the market to go up/down is an XNOR function with inputs "Is the market up?" and "Is the current president on my team?"
I have tried to avoid such fallacies. It was probably more than a decade ago that I first read the president doesn't affect the economy nearly as much as people seem to think, and I've tried to bear that in mind no matter who is in charge.
In most cases, it would be like trying to treat the president like a Fisher King who makes the weather good or bad by their mere presence in office.
I'm always open to specific causal stories that are exceptions to this rule, but I don't naively assume the president has anything to do with the stock market one way or the other. (Liberation Day and the brief stock crash that followed would be part of the exceptions that I allow for.)
I think one of the biggest things the president does there is act as a bellwether (and sometimes steerer) of the zeitgeist. I don't think Carter's malaise speech was wrong ("a crisis of confidence" reads accurate describing the present), but the economy's direction ultimately depends a lot on individual decisions like "should I open my own shop?" which are heavily weighed in by emotional factors. There is an element of self-fulfilling prophecy that I think really needs maybe-irrational confidence at the helm. IMO Carter's mistake was thinking you can just tell people to be confident.
But the policy decisions clearly do have some weight too.
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To some extent, I think just the fact that tariffs disappear in the "other stuff" is a downward adjustment on their importance compared to how Ive seen people talk, irrespective of what the "other stuff" is. Basically, for this balancing-out to be likely, the true effect of tariffs must be small compared to the yearly variation in growth. And again, all this has to come out of things we newly learned this year. At least to me, the tariffs seem to be the only events here with a visible effect size. Ruling out bubbles is stockmarket-complete, but this problem applies to any other methods you might use to assess politician performance equally.
The take that all of policy is a small part of the development... certainly its possible that the kind of variation in policy that you actually see in a given country over some time period is that small, but broader claims quickly run up against much of conventional development economics.
Thats what I would expect. Rent control is bad, but ultimately a small part of the economy. Im not a housing-theorist-of-everything. Putting tariffs (even order-of-magnitude increases relative to previous variation!) into the same category as that is basically my conclusion.
Couldn't a lot of it be because the average effective tariff rate didn't actually go up that much? I think it might be reasonable to say both that tariffs had less impact than many economists predicted on the economy this year, and also state that this might not have been true if Trump had stayed the course with his Liberation Day tariffs.
Whether we're in a bubble or not, sources are reporting that 40% of the stock market is tied up in tech/AI stocks. If we're in the initial phases of a singularity (a big 'if'), then we might expect the economy to do well in spite of almost any burden we could place on it.
I think I perceived you as trying to claim more than you had warrant to claim. If you're just saying "the stock market did incredibly well, and the tariffs didn't have that much of a negative impact", then I'm fine with that claim. If you're claiming it did well because of Trump and his policies, then I would like to see a causal argument that explains what he did that had such a strong positive impact that another president wouldn't have done. My prior from past reading is that presidents generally don't have much measurable effect on the economy one way or the other (certainly much less than people commonly believe), and while I would expect Trump to be the exception to that (for both good and ill) if anyone was going to, I think his own concern about the stock market creates its own feedback loop that makes the statement true of him as well.
That’s why I have a hard time trusting the market right now, when most of its value is contingent on the atheist rapture happening, it does not make me confident.
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As per my links, average effective tariff rate was 22.5% based on April policy, and is 17.9% based on current. Before it was 1.5%. That is a big increase, and not that much of a walkback, though they were selective with that. Still, if the current ones are invisible, the old one cant have been that bad either.
I think if the market were banking on singularity, we wouldnt need to interpret it out of stock data, we would hear it quite clearly from the humans doing that trading. The AI hype is still well short of that level.
No, I dont think it did "incredibly" well. In fact, the more incredible a given level of performance is, the less likely it is - and the argument is that that limits how bad the tariffs can be, since they need to balance.
The election day change in previous years was: 2008: +3.2% (but back into the negative the next day) 2012: +0.8 2016: +0.1% 2020:+2.1% (due to the fraud saga, the one day change may be insufficient here).
I don't doubt that there might be single-day effects attributable to presidential actions. I'm sure the stock market also reacts when we announce a new war or whatever.
I'm more interested in long-run effects, that don't wash out over time. I'd be interested in seeing stock market data going back as far as we have it, along with presidential election day bumps and whether they washed out over time, and whether they tended to be "retroactively justified" by the conditions of that presidency. A one day bump means basically nothing. I'll agree it is people trying to anticipate the effects of the presidency, but there's plenty of cases where markets do silly and unjustifiable things, it's just that other people end up making money when people do that.
If election day bumps are sometimes correct and sometimes wash out, you could predictably make money selling into them. There need to be some cases where they underestimate the real change to balance things out.
I take it that you dont like the efficient (or as I prefer, inexploitable) market thesis, but this is a relatively strong case for it: due to the political connection, many will have considered the question.
And the most considered question in this field is whether there is mean reversion. There isnt, except sometimes with very large drops, where its really about credit prices. A change from one day to he next means just as much as that same change if it takes a month.
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