For those of you who are looking for an explanation why the stock market suddenly become tumultuous in the fourth quarter of 2018, you can stop searching: President Donald Trump.
I don’t say this lightly.
For the better part of the past three years, I have suggested that investors not let their partisan political views influence their choices. This is no longer the case. The Trump administration’s policies, passed as legislation by Congress and implemented by the executive branch, have driven interest rates higher, made deficits bigger and led to a trade war, and are risking a global slowdown and even a recession.
For a while, markets were able to ignore this and absorb the flow of good news about the economy, which finally was shedding the drag from the financial crisis. At the same time, I also said presidents generally get too much credit or blame for the economy, although they can, of course, screw up. Indeed, a president, whether misguided by his advisers or ill-informed (this president has both going for him), can make things much worse. As I wrote earlier this year:
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.
I assumed that Trump’s aggressive style, economic ignorance and personal peccadilloes wouldn’t leave a lasting mark on either stocks or bonds. Now, roughly two years later, the chaos surrounding this presidency proves that was wishful thinking.
At the risk of engaging in narrative fallacy (with a dash of hindsight bias), let’s consider three distinct policies of this administration, and how they are hurting the economy and markets:
• Higher interest rates: Trump replaced Janet Yellen, a dovish Federal Reserve chief (whose policies he liked), with hawkish Jerome Powell, whose policies he dislikes. Rates have gone higher, and it is the proximate result of the president’s appointment.
There is no one else to blame for this mistake but the president. Powell’s leanings were well known; so too were those of Trump’s appointment for vice chairman, Richard Clarida.
This self-inflicted error is perplexing: When Trump was running for office, he berated Yellen, saying she “should be ashamed that rates were so low.” We have since found out that he did not re-appoint Yellen because he felt that, at 5-foot, 3-inches, she was “too short” to run the central bank. This has to be one of the great unforced mistakes in the postwar history of U.S. monetary policy.