Stocks Rally After Trump’s Victory
American politics and economics continue to change rapidly, but the merging of fiscal policy and market reaction these days seems more pronounced than it has in a long while. Donald Trump’s recent election has sent a fresh wave of reactions through financial markets—a stock market rally, for one—as people grapple with the potential implications of his proposed tax cuts. Are they good for the now-fully-revived Trump rally on Wall Street? Maybe. But what’s probably a more pertinent question given the average American’s subsistence on a stable economy is this: Are they good for the federal budget and the economy as a whole?
This article contends that although the market’s immediate response to Trump’s election seems to be quite positive, underneath that appears to be something much deeper and more concerning that’s kind of hard to ignore. It’s like a bad dream that keeps reanimating itself, and if you’re a long-term investor, it’s certainly something to keep an eye on. And that basic plotline is: what’s rising and what’s not rising in this market tells us 2017’s going to be a big year for federal borrowing, and if you’re an investor in federal debt, it might not be so good for you.
Interest Rates Climb Amid Higher Deficits
When bond supplies increase, interest rates tend to rise. That, in turn, tends to make servicing going-forward debt more expensive. The overhanging debt of the federal government—not just annual deficits but also the bulge in debt from already incurred obligations—hasn’t been restructured for a year now and instead is getting deeper and deeper into the mire of Treasury securities. Dr. Mark Zandi, chief economist at Moody’s Analytics, warns of the downside: “Higher deficits can lead to higher interest rates,” which then “can” and “do” stifle economic growth in the long run. Yet the stock market seems dandy, and rising interest rates have not set off a wave of panic. This paradox raises some important questions.
Investor Sentiment on Federal Budget Deficit
For decades, the U.S. federal deficit was a divisive issue that swayed with the winds of political leadership and economic conditions. Under Joe Biden, the deficit swelled with the spending that went with the pandemic. But if Donald Trump comes back to power, the way he might is signaling now could draw us back toward massive tax cuts designed, as they always are, to pump up the economy. Still, look at the upside with President Trump: the kind of deficit we lived through in the Obama years is back to no-growth, stimulus-wise, while the bond market, seen by many as the economic health barometer, has a sharply adverse reaction and winds up influencing everything from mortgage rates to the costs of corporate borrowing.
Investor enthusiasm over Trump’s business-friendly agenda is responsible for the stock market’s rise since the November election. However, this enthusiasm is not reflected in several important market indicators. The stock market has extended its gains despite the fact that the economy is in the midst of a jobless recovery. Talk of bringing back Glass-Steagall, a law that prevented banks from speculating with depositors’ money, has not yet stopped the flow of money into the stock market from affluent Americans. In fact, the market has continued to scale new heights. Despite all this, a seven-month-old puppy sent by an old friend for a birthday present has done far better than the stock market since November. With one exception, every time the puppy has flipped a coin to make a decision, the market has gone up or stayed the same.
Dollar Strength Indicates Investor Confidence
The stock market may look good today, but high federal deficits and interest rates are probably going to end up hurting the economy. Sure, you say, sometimes you have to take a step back and do what’s necessary, like building infrastructure or increasing human capital through better education, which, despite the wall-to-wall propaganda for a “low tax” revolution, sometimes just requires plain old public spending.
Anyway, as my mom would probably point out, just because the stock market is doing okay right now doesn’t mean it’s a harbinger of anything good for the American economy—especially if you’re not a day trader.
In addition, supporters of tax reductions generally ignore the chance of decreased federal investment in vital places like education and infrastructure—investments that are fundamental for long-term growth and the kind of power we want for the economy. They seem not to appreciate that the federal spending they want to cut and the interest rates they want to keep low are working for them right now. As for the average American, what we might face is altogether dismal. Rising interest rates can lead to severe financial strain on everybody and every level, absolutely yes, on top of that, in the emotional and human-to-human space of financial aid, federal cuts to the College Access Program and the need for more federal work-study funding are unbelievably tragic.
To sum up, in the wake of Trump’s election, the stock market may appear to express a growing confidence among investors. But underneath that surface, you can find the undertow of concern about what mighty forces might be unleashed. Rising interest rates and a ballooning federal deficit are already worrisome enough. If the tax cut impacts play out the way some (not just Steve Mnuchin, the Treasury secretary, but also private economists) say they will, we could very well be looking at a crisis in the next several years. And that would be a crisis not of our current making (as in the Great Recession) but of our children’s and grandchildren’s making, a crisis for which they will be ought to be held accountable, so long as we have a history and a few dollars to buy bonds under which they will work off the debt.