Ominous headlines have dominated the news since Donald Trump was elected president. A parade of unprecedented events, ranging from trade wars to mind-bending changes in the western alliances, have many on edge.
But not investors.
If there is a single question that I have heard more than any other during the past few months, it is: “How are markets so blasé about the endless threats to financial stability and order from the president?”
Many theories are tossed around. Some resonate more than others. What follows is a short summary of why markets haven’t freaked out over the ongoing spectacle of what used to be called market-moving news, but today merely is the state of the world.
1. Just wait: I hate this arrogant, frustrating response. Typically, it comes from people who refuse to admit error after predicting disaster from the Trump presidency. It amounts to saying: The market is wrong, I know better and I will be proven right eventually. Any thesis that requires one to wait years to prove or disprove its validity is inherently annoying.
However, (you knew a however was coming, right?) momentum does sometimes carry things much further than anyone reasonably expects. During the tech bubble in the 1990s, there were overwhelming signs of absurd and inflated valuations; that went on for what seemed like a very long time before its eventual ignominious end. So too did housing excesses continue for a long time during the credit boom during the 2000s. That too, of course, ended in a debacle.
Maybe this will be one of those times, leading to crisis. Recall the maxim uttered by economist Herbert Stein: “When something is unsustainable, it will eventually stop.” I leave it up to you to decide whether whatever is happening right now is unsustainable.
2. Investors have become inured to the noise: The endless stream of blunt presidential tweets; the constant preening and posturing; the drumbeat of ego and bluster. We have a sense of what those alleged sonic attacks on U.S. consulates overseas must be like -- an annoying, relentless, headache-inducing, weapon of noise and disorientation.
When he was first elected, Trump could move markets and stock prices with a single scolding tweet. Now, not so much. Not only do markets barely respond to his Twitter outbursts, they seem willing to take the other side of the trade; stocks that Trump has disparaged have outperformed the ones he likes.
Why is this? The constant of human adaptability looms large. We eventually get used to just about everything (that doesn’t kills us), both positive and negative.
3. The economy is so big, it doesn‘t matter: Everyday, you wake up, have a cup of coffee or breakfast, get dressed, send the kids to school, go to work. We forget just how huge this is: it adds up to more than $18 trillion of annual economic activity.
A $50 billion tariff here or a $100 billion trade war there is barely a rounding error in the global economy. The U.S. economy is huge, and the global economy is four times as large. I don’t want to suggest tariffs are meaningless, but they matter much less than some of the fevered imaginations around us might have you believe.
4. Presidents are inconsequential: I have said this many times over the years, but it bears repeating: Presidents get too much credit when things go right, and too much blame when they go wrong.
You could argue that the word inconsequential is an overstatement, as presidents can and do mess up. Richard Nixon’s opening of formal relations with China had far-reaching consequences; the deregulation of markets under Jimmy Carter, Ronald Reagan, Bill Clinton and George H.W. Bush was surely important for the economy in ways both good and bad; so too was President George W. Bush’s invasion of Iraq. But these were all broad policies that took years or even decades to be felt and understood.
5. All of it is already reflected in prices: This is my favorite, and least appreciated, explanation.
Recall that in 2015 and 2016 candidate Trump said he thought the North American Free Trade Agreement and the Trans-Pacific Partnership were terrible trade deals and he would revoke or renegotiate them if elected. He also promised to protect U.S. manufacturing with tariffs and claimed that the U.S. was being robbed through lousy deals negotiated by his predecessors. He said this at every campaign stop, every rally, every interview. The only surprise at this point is that anyone could be surprised.
Never mind that this was all contrary to what the Republican Party stood for -- this is what Trump said he was going to do and is in the process of doing. Anyone who is shocked either wasn’t paying attention or didn’t want to believe Trump was going to follow through on the cornerstone pledge of his campaign.
Confusing politics with corporate profits and the state of the economy is not the ideal way to invest. The noise crated by the president has been a constant backdrop to the expansion of the U.S. economy that began before Trump was elected and has continued ever since. Until that changes, most of what Trump does will mean little to financial markets.