Why The Stock Market's Rise Isn't Just A Trump Rally

Jul 20, 2017
Originally published on July 20, 2017 8:01 pm

If you've checked your retirement account lately or read the business headlines you probably know the stock market is riding high. The major U.S. stock indexes are in record territory. So what's lifting the market? Despite all the turmoil in Washington, is it still the Trump rally?

Since the U.S. election, the S&P 500 is up 16 percent and the Dow is up 18 percent, even though President Trump has yet to deliver on most of his pro-growth policies, including tax cuts and a big infrastructure plan.

But finance professor Jeremy Siegel of the University of Pennsylvania's Wharton School says Congress and the White House have eased regulations and produced "a friendly attitude towards business. That's one positive" for stocks.

Plus, corporate tax relief from Washington is still a possibility. The failure of the health care bill, while a black eye for Republicans, could actually clear the way for congressional action on taxes later this summer. That's helping drive stocks higher.

Other forces driving the rally

But there are other forces driving the stock rally "that are not attributable to Trump, at all," Siegel says. One is faster global growth. That, combined with a recent decline in the value of the dollar, has sparked more demand for U.S. goods abroad, helping boost U.S. company profits.

"Almost 40 percent of the profits of S&P 500 companies come from abroad," Siegel says. So, a stronger global economy is boosting U.S. stock prices.

U.S. growth is still sluggish — a 1.4 percent rate in the first quarter — and far below the Trump administration's goal of 3 percent.

However, job creation has been solid, boosting incomes. Siegel points out that another thing that has helped stocks is the fact that they face no real competition from other assets. Bonds, the main alternative, aren't that attractive. That's because long-term interest rates remain very low and investors would rather buy stocks than a 10-year Treasury that gives them an annual return of only 2 1/4 percent.

A stock bubble?

Some people see this as a dangerous stock market bubble, though Siegel isn't one of them. That fear is largely connected to the huge stimulus central banks have injected into the global economy since the financial crisis. The concern is that lots of that money has been invested in stocks, dramatically inflating their value. Central bankers, including Federal Reserve Chair Janet Yellen, have made clear the stimulus will be taken away very gradually. So far, that's been enough to reassure investors.

However, if the effort in Washington to get a corporate tax cut stalls, Siegel says that will have "a negative effect" on stocks.

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AUDIE CORNISH, HOST:

The stock market is riding high these days. The major U.S. stock indexes are up near record highs. A number of global indexes are, too. NPR's John Ydstie is here to talk with us about what's lifting the market. Hey there, John.

JOHN YDSTIE, BYLINE: Hi, Audie.

CORNISH: So in the months after Donald Trump was elected president, the market actually rose, and everyone called it the Trump rally.

YDSTIE: Right.

CORNISH: But there's been a lot of turmoil in Washington since he took office. So it's what we're seeing in the stock market connected to the president?

YDSTIE: Well, since the election, S&P 500 is up 16 percent, and the Dow is up 18 percent even though President Trump has yet to deliver on most of his pro-growth policies. On the other hand, the Congress and the White House have eased regulations and created a more business-friendly regulatory environment, and that's helped stocks. Also there's still the possibility of tax relief. And a failure of the health care bill could actually clear the way for action on taxes later this summer. That's helping drive stocks higher. But there's enough skepticism that I would say it's not solely a Trump rally anymore.

CORNISH: Well, if they don't think it's a Trump rally, then what else could be pushing stocks to these levels?

YDSTIE: Well, one big reason is that the global economy is growing faster. That combined with the recent decline in the value of the dollar has sparked more demand for U.S. goods abroad. That's helped boost U.S. company profits. And here's a relevant data point. Forty percent of the profits of S&P 500 companies come from foreign sales. So a stronger global economy is boosting U.S. stock prices.

CORNISH: What about here in the U.S. though? I mean growth here is still sluggish for many people far below the Trump administration's goal.

YDSTIE: True. But the U.S. economy does continue to chug along. And there's still solid job creation. And another thing that's helped stocks is that they're very attractive compared to bonds, which investors see as the main alternative. That's because long-term interest rates remain very low. And investors would rather buy stocks than a 10-year bond that gives them an annual return of only 2 and a quarter percent or so.

CORNISH: Now, people are talking about a stock market bubble. So how real is that fear?

YDSTIE: Yeah, you know, that fear is largely connected to the huge stimulus central banks have injected into the global economy since the financial crisis. The concern is that lots of that money has been invested in stocks and dramatically inflated their value. Central bankers like Janet Yellen have made clear the stimulus will be taken away very gradually. So far that's been enough to reassure investors. However, back to Washington turmoil - if efforts to get a tax cut stall, we're likely to see stocks retreat.

CORNISH: That's NPR's John Ydstie. John, thank you.

YDSTIE: You're welcome. Transcript provided by NPR, Copyright NPR.