Aug. 9, 2017 7:44 a.m. ET
SAUL LOEB/AFP/Getty Images
In an early morning tweet last week, President Donald Trump cited the stock market’s “all-time high” as a sign of his administration’s success a half year into his presidency.
Past presidents have claimed credit for the stock market’s success. Indeed, the stock market hit dozens of new all-time highs during the presidency of Barack Obama, a man not widely appreciated on Wall Street.
But Trump can make a solid claim that he has taken steps to help stocks. His election, along with the election of a Republican-controlled House and Senate, suggested to investors that tax cuts for individuals and corporations, and an overall lessening of regulations for U.S. industries including banking, were inevitable in some form. (A proposal to boost infrastructure spending by perhaps $ 1 trillion was sort of the icing on the cake.)
Hillary Clinton might have been the more predictable presidential candidate, and markets famously prefer predictability to uncertainty. But Trump’s “pro-growth” Republican platform, despite the threats to undo free trade as we know it, was geared to make investors happy.
Nine months since the election, not much has changed on that front other than the timing, and perhaps degree, of tax reform that will finally be enacted.
Several publications, including Barron’s, wrote ahead of the November election that an upset Trump victory could send stocks lower.
These reports were proved wrong on the first day on postelection trading, and in the days to follow. And the term “Trump rally” earned its rightful place in the investment lexicon.
Though better-than-expected corporate earnings growth might be the underpinning of the bulk of the stock market’s gains, especially in the last few months, Washington’s role in the rally can’t be denied.
But has Washington done enough lately to help stocks?
That’s a question tackled this week by Komal S. Sri-Kumar, president of Santa Monica, Calif.-based Sri-Kumar Global Strategies, a macroeconomic consulting firm, in an article for Bloomberg View.
Sri-Kumar refers to reports that Trump and some members of Congress would still like to come up with a fix for Obamacare, despite previous failed efforts. He argues that such an effort could imperil or at least delay tax reform, a matter of greater importance to investors.
“If Trump and the Senate try yet again to repeal Obamacare and fail, investor confidence in a subsequent passage of market-friendly reforms is likely to take another hit, with unfavorable implications for the equity market,” he writes.
Short of additional surprise earnings growth in subsequent quarters, the markets need added cooperation from Washington, Sri-Kumar argues, since valuations are stretched.
“For example, the Standard & Poor’s 500 Index is trading at an elevated 21 times the past 12-month per-share earnings, and at more than 30 times earnings, according [to] Yale professor Robert Shiller’s cyclically adjusted P/E (CAPE) measure,” he adds. “Simply put, corporate earnings need the tailwind of favorable tax and regulatory policies if they are to continue rising.”
Washington, are you listening?
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