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Is Trump to blame for the market dive?

Catherine Rampell on

President Trump has been bragging about the stock market since he took office, attributing any upward movement to his stewardship of the economy. Curiously, with the market tumbling in recent days, he's been a teensy bit shyer about taking credit for market performance.

So: What's going on? And is Trump to blame?

Markets move in mysterious ways -- animal spirits and all that -- and you should be skeptical of anyone who claims they can definitively explain any particular twinge of the ticker. Still, we can point to at least a few factors that could be making traders nervous right now.

The first is that stocks have looked pricey for a while. Consider the long-term price-to-earnings ratio. That's a measure of how much a stock costs relative to how much that company has been making in profits. That ratio is about twice as high as the average from the past century, a sign that stocks have likely been overvalued.

In fact, the ratio for January was at its highest level since mid-2001, when the dot-com bubble was mid-pop.

Of course, we've known for a while that this measure has seemed out of whack. That doesn't explain why we had such a sharp correction mere days after Trump's State of the Union, when he went out of his way to boast about record highs on Wall Street.

So a second explanation, at least as it relates to timing, has to do with recent economic data.

Inflation has been unusually low for a while. But some recent reports suggest that could change. For instance, Friday's jobs report showed U.S. wages rising at their fastest annual pace since June 2009. This is generally welcome news, especially since we've seen such sluggish wage growth for so long. But higher wages could also be the start of higher prices -- that is, faster inflation.

If prices rise more quickly than had been expected, and the economy suddenly looks as though it is overheating, that might lead the Federal Reserve to raise interest rates more quickly than it previously suggested it would. If rates rise more quickly, that's generally bad for stocks.

In the several months leading up to Friday's sell-off, rates on 10-year government bonds had been creeping up. Rising yields can reflect anticipation of higher inflation and could also convince the Fed that it soon needs to nip inflationary concerns in the bud.

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