The stock market appears to be growing without a stopping point in sight. This past Wednesday, the Dow Jones Industrial Average broke 21,000 and the S&P 500 broke 2,400. The DJIA recently had a 12-day streak of record closes. While the DJIA is not a great indication of how the economy or the markets are doing—due to its antiquated weighting system—normal firms like Bank of America and Apple are hitting new highs daily. Just this Wednesday, Bank of America closed at $25.50. That same day last year, it closed at $13.38. Bank of America’s share price has nearly doubled in a year. Most of the growth in the S&P has been seen since November 8th—Election Day. Since then, the S&P has grown 11.98 percent and the DJIA has grown by 15.81 percent.
This should come as a no-brainer. President Trump is in favor of cutting both income and corporate taxes. The current income tax regime is composed of seven brackets, while President Trump’s tax plan is composed of only three brackets. These brackets favor earners with larger incomes. President Trump has stated that he would like to lower corporate taxes from a rate of 35% to 15%. To offset this cut, President Trump has also proposed a border adjustment tax, which essentially taxes imports at a rate of 20 percent. This resembles what the UK’s Chancellor of the Exchequer, Phillip Hammond, stated during the Autumn Statement. He stated that the UK would lower corporate taxes to 17 percent in order to retain business—and it worked. So are we seeing record breaking changes in the DJIA and the S&P 500 because President Trump is a Republican? And because he’s proposing tax cuts that will inevitably make business easier and more affordable?
Sort of. This past Tuesday, President Trump gave his first address to a joint session Congress. President Trump made it clear that he was eager to end “trivial fights” and work to help everyday Americans. The address was lauded as being rather optimistic, calm, and politician-like, something new for President Trump. According the New York Times Upshot, the positive tone, diction, and message in Trump’s address to Congress closely resembled a State of the Union Address. Interestingly enough, on the day following his address to Congress, the DJIA closed at a 1.46 percent increase.
Why is this increase notable? Hasn’t the Dow been doing well? Yes, the Dow has been growing rapidly as noted earlier. However, there is more to it. Because President Trump’s joint address to Congress resembles that of previous President’s State of the Union Addresses, we are able to compare it to previous presidents and how they affected the economy. If we look at the change in the DJIA after each State of Union address, you may noticed a trend—or rather a lack thereof. While Republican Presidents saw the largest increases in the DJIA, it’s been fairly even from each side of the aisle.
At a cursory glance, it appears as though the Trump presidency has single handedly caused the rapid growth of the market. However, other presidents have promised pro-business policies. Why are we only seeing such a bullish market now?
President’s Trump’s policies are definitely aiding in the growth of the market, however there is more to this equation. It is important to note that we are still in the same business cycle since 2009. We have been in the same upward-swing of the business cycle for 93 months. Interestingly enough, the average business cycle lasts approximately 69 months or roughly six years. In addition to an above average upward-increase, there are indications that the economy is slowing. Unemployment in January was 4.8 percent, which most argue is full employment for the United States. In addition, according to the Bureau of Labor Statistics, the consumer price index increased by 2.5 percent from January 2016 to January 2017, which is the highest year-over-year increase since March 2012. In addition, the Fed will most likely raise interest rates in mid-March due to these changes in inflation and unemployment. Another indicator of a peak of a business cycle is the intensification of the bull market. This is apparent with the follow-through after Snapchat’s IPO, where writers and the media are trying to find the “next” Snapchat. Here, the recovered economy hand-in-hand with boosted confidence of sustained future profits has revved up the bull market once again. The market plays off of fear and greed, and right now investors are getting greedy as the market seems to be unable to stop growing. CNN’s “Fear & Greed Index” is tracking the market at an 81 out of 100, or extreme greed.
We’re seeing a perfect storm of events in regards to the US economy. Profit conducive policies proposed by President Trump has only amplified the effects of the business cycle. In short, is the current growth of the economy sustainable? Will President Trump’s policies help to mitigate the eventual downturn, or will an asset bubble-burst and accelerate the downturn just as it has in the past?