Recently, I have come across quite a few posts on social media from my fellow Vietnamese back in my country about how the current President is responsible for the economy, evidenced by the unprecedented height of stock markets.
I am not so sure about that.
First, when a President takes office, he (since the US never has a female President) inherits his predecessor’s policies and economy. Discarding the existing policies takes time. New policies take time to go into effect. Then, it takes time to measure the effectiveness of the “new” economy. Economic policies aren’t light switches. Turn them on and the lights go on. Turn them off and the darkness comes. To determine whether the sitting President is truly responsible for the economy, one must be able to determine which policies were enacted and how the policies impacted the economy. I prepared a simple chart to illustrate the issue
To truly see how Trump stewarded the economy, one must be able to compare his performance with the trajectory based on what happened under Obama. Take all the factors, build a model and see how the predicted economy would have happened had Obama still been in office. Then, compare Trump’s performance to the model’s prediction which is the dotted line in the chart.
Take a look at the red line. The stock market still grew under Trump and still hit the all-time record. But then it is below what would have happened had Obama still been in the office. In that case, would you still say Trump did a good job? On the other hand, Trump should be credited for the stock market if his performance is the green line. Not only does the stock market hit the all-time high mark, but it also outperforms the model. No doubt about his credit here.
Here is exactly where the issue becomes tricky. It’s almost impossible to build an accurate model like that given how many unpredictable variables there are. As a consequence, I really doubt anyone can say with absolute certainty that one President is responsible for the stock market’s growth or that of the economy.
Now, one can definitely argue that as long as a President is in office, he or she should take credit for the economy and stock market’s performance. It’s fair to do so. But if that’s the case, he or she should also be responsible for everything wrong with the economy or stock market. You can’t cherry pick what to take credit for and what to avoid blame for. It doesn’t work that way.
If Trump takes credit for the stock market performance, he should also be held liable for the tariffs that are said to be suffered entirely by American businesses or consumers (CNBC) or for the huge increase in federal budget deficit (by 50%) since he took office (source: Heather Long).
It’s also worth noting that stock market performance, low unemployment rate or GDP growth or all together do not equal to increased wealth for average Americans. You can have all of them and increased income inequality, meaning that most of the increased wealth goes to the rich or the 1% or 10%, not the poorer Americans. And who should be held liable for that? The one who takes credit for the economy/stock market!
I really wish my fellow Vietnamese would be more informed
The stock markets are crashing now. For quite obvious reasons. Tariffs, trade wars, the government shutdown that has no signs of being abated soon. Markets don’t like uncertainty, chaos or unpredictability.
The S&P500 has gone down by 15% since October. Apple has lost 38% of its market capitalization in the same time frame. My phone has repeatedly received notifications on the 52-week lows of the stocks in my portfolio for the past few weeks.
The knives have started falling. Should you stand still and try to catch the falling knives?
I listened to the interview between Tim Ferriss and Howard Marks, the author of the book: The Most Important Thing: Uncommon Sense for The Thoughtful Investor; which I highly recommend.
Howard argued that it is only when the knives are falling are people terrified and do the bargains show up. If we wait till the dust settles, the bargain will be gone. But when should one start buying to take advantage of the downturn? It’s up to one’s skills. Howard also cautioned that buying during the downturn isn’t enough to guarantee returns. Investors have to be right first and if investors want to outperform the markets and everyone else, they must have insights that no one has or the 2nd layer of thoughts.
If you are interested in investing and business, it is a great interview with a lot of insights. Have a listen while driving or working out or cleaning your place. It’s worth your time.