Will Trump Bump Hold?
20,000 may just be a number, but it's a big, round one. It took 42 days for the Dow Jones Industrial Average to move from 19,000 to 20,000, the second fastest thousand-point rise in the history of the index. (The quickest occurred in 1999, when it took just 24 trading days for the Dow to rise from 10,000 to 11,000.) The most recent leg up in the market has been referred to as “Trump Bump,” because the index has jumped by about 9 percent increase since Election Day.
Before figuring out whether or not the Trump Bump will hold, I would be remiss in not saying that despite the fanfare, the Dow is widely seen as the least meaningful U.S. stock index available. Sure it’s got history on its side—is was created by Charles Dow in 1896, in order to provide investors with a snapshot of how the overall stock market was doing. But for an index that is supposed to provide investors with a big picture view, it includes just 30 large companies. And considering that Amazon, Google and Facebook are not part of the Dow, it is hard to make the case that it reflects the broader market.
Besides its limited size and scope, there’s another big problem with the Dow: the way the average is calculated makes no sense. The index is “price-weighted,” which means that the company with the highest price per share carries the most weight in calculating the daily index value, while the company with the lowest price per share carries the least weight. Because of this method, the daily performance of an expensive Dow stock, like Goldman Sachs, can have an outsized impact on the whole index. That’s why professional investors do not look at the Dow to determine what’s going on in the U.S. stock market; instead they use the S&P 500 or the Wilshire 5000, both of which use a different methodology based on market capitalization (number of shares outstanding multiplied by the price) of a company, to determine the index’s value.
Despite the inadequacy of the Dow, the other major indexes all touched new records during the week, extending the current bull market, which started in March of 2009. For the record, this is the second longest bull market on record. The longest bull ran from December of 1987 and concluded when the dot-com bubble burst in March of 2000.
When we reach these milestones, it gives us a sense of progress. Stocks have tripled since the bear market lows, which tells us that a wide swath of Corporate America has been doing quite well over the past seven years. But as a reminder, the stock market reflects a slice of the economy; it does not tell the whole story. It does not tell us whether or not people who have been struggling are getting better jobs or earning enough money to rise up the income strata.
According to a Gallup poll, a whopping 48 percent of Americans do not own a stock, a stock mutual fund or have exposure to stocks through a pension plan. These people are hoping that the new stock index records portend better economic times ahead, which would prompt companies to add more jobs and increase wages.
The biggest threat to the Trump Bump may be Trump himself. As expected, he has officially withdrawn the U.S. from the Trans-Pacific partnership; he has apparently broken WTO & NAFTA rules, by ordering a new pipeline project to use US steel; and is threatening to tax Mexican imports (and perhaps all imports) by up to 20 percent in order to pay for the border wall that he hopes to erect.
Analysts from Capital Economics point out that “the key question is whether the new US administration will bring this recovery to an end…For now, we suspect that he will not do enough damage to completely undermine global growth prospects, but the risks appear to be rising.” Most economists agree that across-the-board tariffs could risk widespread retaliation and a global trade war. In that case, the Trump Bump could be headed for a major slump.