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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.
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?
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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