Similarly, consider the Standard & Poor’s 500 Index’s performance in 2018 — high volatility and minimal gain versus 2017’s increase of more than 20 percent amid market calm. What if the S&P 500 had had a more typical year in 2017? Let’s invert the big gains and low volatility and consider a more usual scenario — say, a high single-digit percentage gain and moderate levels of volatility. Had that happened, do you imagine this year might be very different from what it is? If so, it’s easy to conclude that the weak returns and high volatility of 2018 are a reaction to the strong but low volatility of 2017. This inversion/counterfactual suddenly makes most of the other theories about the market sound like nonsense.
Since tomorrow is the midterm election, let’s do one more exercise, covering the intersection of economics, markets and politics.
The most exasperating version of this is the complaint from those on the left that “nothing seems to stick to Donald Trump.” From the Stormy Daniels imbroglio, Russian election meddling to countless examples of ethical lapses and dubious financial dealings, it all seems to bounce off of him. Despite one outrage after another, goes the lament, he is impervious to any and all repercussions for his actions.
I believe this is a false construct. And, I believe I can use a simple counterfactual to demonstrate why this is so.
Imagine a president, any president — party is of little importance here. He or she gets elected during a strengthening economic recovery. A year after the election, the economy is doing about as well as before — jobs are being created, growth is picking up, the unemployment rate continues to decline and the stock market keeps rising. This president passes a substantial tax cut. The economy continues to improve, and by the end of the second year in office, stock markets are at new highs, the unemployment rate has fallen to levels not seen in 60 years and consumer sentiment is at multidecade highs.
Now, ask yourself, what should that president’s approval ratings be? Maybe 75 percent? Even higher? If you said less than 70 percent, you’re kidding yourself.
By way of comparison, the day Richard Nixon resigned in August 1974, his approval ratings were in the mid-20s. Yes, the Watergate scandal was the reason, but so was the economy, which entered a recession in November 1973. Amid an economic boom, Bill Clinton’s approval was 66 percent, even after Congress impeached him for lying about his affair with a White House intern. Ronald Reagan’s approval ended at 63 percent amid an economic rebound after the 1987 stock-market crash.
During the past year, Trump’s approval rating has held fairly steady at between 38 and 42 percent. In the counterfactual described above, if you knew nothing about Trump, you might think his approval rating should be double what it is now. So the claim that nothing hurts him is demonstrably false. His approval ratings are at least 25 to 30 percentage points below those of a more traditional president’s.
We experience the world as a series of probabilistic outcomes, most of which could have come out very differently. Investors should be cautious about explaining what happens by only looking at results. Instead, always consider the counterfactual. It often tells more than the facts themselves.
This column was provided by Bloomberg News.