10 Things Trump Gets Wrong About the Stock Market

Given the fact that polling numbers still show that many people rate President Donald Trump highly for his handling of the economy, it would seem that many Americans are overlooking that the way he views a successful economy is incomplete. The problem with Trump’s view of the economy is that he has fixated on one metric as being representative of much more than it actually is — the stock market.

So what has Trump gotten wrong about the stock market and what it really represents? Here’s a closer look for people who want to know more about stocks.

Public stock markets are, in a certain sense, a massive step forward in the battle for wealth equality. Of course, that’s when you’re comparing to feudalism, and even there the results still aren’t reaching roughly half the population. So while Trump recently insisted that “everyone owns stocks,” the truth is it’s actually about every other person.

If about half the population doesn’t own stocks, it means that their assets just aren’t growing at the rate of the market. If you assume that “everyone” is doing well because stocks are up, you’re going to miss the huge segment of America that is simply getting left behind by the current stock rally.

Even within the 50% of the population that does own stock, the split should indicate that even the members of John Q. Public with a 401(k) are still just getting a tiny slice of the returns from a soaring Dow. The top 1% holds roughly nine times as much stock as the bottom 90% of the population, as sorted by income.

Expanding stock ownership to a larger section of the population would mean the American public really would benefit from a soaring stock market, but until that happens, its benefits primarily just go to a very tiny slice of Americans. What’s more, those benefits are disproportionate. The more stock you own, the more you benefit. So while there are a lot of people who are benefitting from record highs, they’re only getting a fraction of what the richest Americans receive.

It’s actually a bit ironic to see Trump fixating on the stock market as some sort of universal economic indicator, given his own failure to take advantage of it. Trump’s personal wealth is only a little higher than what it would be had he simply taken his inheritance from his father and put it into an S&P 500 index fund.

If you’re thinking that keeping pace with the S&P 500 shows some sort of business acumen, keep in mind that he took much, much more risk in the world of real estate development than simply sitting back and accepting market returns. Toss in that if Trump had “bought the dip” in early 1988, he could be worth roughly four times what he is now while engaging in the single simplest, most straightforward investment available to almost any American today.

One need merely examine the fact that Tesla is worth roughly $350 billion in spite of never producing more than 500,000 cars in a year to understand this. Toyota, for context, is worth a little over half as much while making and selling about 9 million vehicles. How is that possible? Because stocks often aren’t being judged by the present but rather what they might be in the future. And, since no one can see the future, that can also mean that the expected success just never materializes.

True, those regular earnings reports tend to mean that you have to produce actual results eventually, but the value of a company’s stock tends to soar long before any actual profits hit corporate balance sheets — sometimes without the profits ever actually materializing. If you assume a good year in the stock market can’t just disappear in a matter of weeks, you clearly haven’t spent much time watching the markets.

It is true that for all of the wild ups and downs along the way, stock prices will start to line up with the actual money companies make in a long enough time frame. However, even there, assuming that soaring stocks mean the economy is doing well would be a mistake.

The correlation between corporate profits and factors like average wages, unemployment and other major macroeconomic stats isn’t at all consistent. In fact, plenty of companies will see a serious jump in their stock price following a round of layoffs. So, not only do high-flying stock markets not necessarily mean the companies they represent are even succeeding, but even when the success is real it may or may not mean anything truly positive for the economy as a whole.

Typically when Trump talks about the stock market, he’s focused on the major indices like the S&P 500 or the Dow Jones Industrial Average. This is because it’s the optics of a good stock market that he cares about. But that doesn’t always represent something real. Both of those indices really only cover the largest of companies. And with literally thousands of public companies out there, the way the big players are doing doesn’t necessarily mean times are good across the board.

The S&P 500 might be setting records, but the Russell 2000 — the best-known “small cap” index that tracks smaller companies — is still in the red for the year. Even if the S&P 500 is soaring, that can still mean all of these smaller players are getting left behind. For the many people who work at those firms — and the people that they care for — those rosy figures in the news aren’t translating to much in their own life.

The reason why most past American presidents had the good sense not to crow about what’s happening on Wall Street is because they knew it could all disappear. Sometimes in a day. Because stocks can rise and fall so much based on investor enthusiasm, when a piece of news makes it clear people have missed the mark things tend to lurch suddenly.

Consider the language used to describe when the market falls far enough — a “correction.” And whether it’s “correct” or not, if you’ve spent years insisting markets are the way to measure your success, it will seriously hurt your reputation. The speed with which markets can fall apart shows that crowing about their returns is not unlike building a skyscraper on sand.

Stocks flying higher than their actual assets can justify isn’t necessarily a good thing. It can seem/feel like one for quite a while, but when the other shoe drops it can mean a pretty destructive cycle. Selloffs frighten potential investors and can play a part in sparking a recession.

If all you focus on is which direction prices are going — and not whether the underlying reality can justify it — you can just be setting yourself up for a rough landing. When people see their 401(k) plans take a hit, it can translate into lower consumer confidence and other issues that can begin to ripple out and affect segments of the broader economy otherwise insulated from their volatility.

One aspect of investing that is often missed by the typical retail investor is that supply and demand operates on more levels than just one. For wealthy investors and investment banks, a place to simply park your money and generate returns is something they need. When one asset type is down, it can lead to the other shooting up even if nothing has changed.

One operating theory on what is driving the stock market so high is that investors aren’t getting enough return from bonds while interest rates are so low. As such, using S&P 500 index funds or blue-chip stocks might present risks but still look preferable to earning almost nothing from a AAA-rated bond.

Another norm shattered by Trump’s presidency was the insulation of the Federal Reserve from political influence. Monetary policy can affect how fast the economy grows, and every president is usually well aware that their reelection hinges on economic success. They will always want to grow as fast as possible all the time, even though it’s unsustainable and can often create serious issues in the long run.

It can seem counter-intuitive to ever want to slow the economy down, but going too fast can lead to things overheating. When credit is easy, more companies will borrow money and try to expand faster — whether it’s a good idea or not. Keep it up for too long and you’ll see more and more business models built on uncertain foundations. If all you’re focused on is how the stock market looks in the next day or week, you’ll miss the damage you’re doing to the economy in the long term.

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