A week ago, President Donald Trump stood before Congress and the world and pointed to his preferred scoreboard for measuring his performance in office. “The stock market has smashed one record after another, gaining $8 trillion dollars and more in value in just this short period of time,” Trump said in his first State of the Union address.

The scoreboard has been bleeding red since late last month, shedding roughly $2tr in paper value since its Jan 26 peak. And on Monday the Dow Jones Industrial Average dropped 4.6 per cent, its steepest percentage drop since August 2011 and its biggest point-based drop ever.

White House officials fanned out over the course of the day to disown a gauge that Trump and his top lieutenants embraced from the start of his term. “The president’s focus is on our long-term economic fundamentals, which remain exceptionally strong, with strengthening US economic growth, historically low unemployment and increasing wages for American workers,” White House press secretary Sarah Huckabee Sanders said after the market close, when the extent of the destruction was clear.

That, of course, amounts to a head-spinning flip-flop. Trump touted the market’s gains 23 times in January alone, the New York Times notes; he tweeted about it at least 58 times last year; Treasury Secretary Steven Mnuchin expressed the sense of the team a year ago when he said the market “absolutely” reflects the administration’s economic record.

But as we’ve seen time and again, Trump and his team shamelessly rewire the standards by which they demand to be judged as conditions shift. (Recall, as just one example, then-White House press secretary Sean Spicer saying good job numbers Trump had dismissed as fake before he took office “may have been phony in the past, but it’s very real now.”)

NBC News’s Benjy Sarlin nails how that’s likely to apply here. He tweeted “People love imagining these scenarios of “Hoo boy, how will the president handle this event that contradicts all his prior rhetoric?’ He’ll tweet it’s someone’s fault then forget about it and move on. This scenario never really goes anywhere.”

And the muddiness of forces behind the stock swoon makes it ripe for a Trumpian spin job. Indeed, nobody’s exactly sure what’s driving the sell-off.

Investment managers I’ve talked to over the past few days have offered a mix of explanations. Most say the dizzying recent runup in stock prices, including in January — when the S&P 500 notched 14 record closes in 18 days, the most in a single month since June 1955 — invited a reset as an overdue matter of course. The jobs report Friday provided a catalyst: It showed wages finally rising at a healthy if not heady rate of 2.9pc — a pickup (the most since 2009) that will nonetheless eat into corporate profits - as inflation also ticked up.

The fact that swelling pay cheques contributed to deflating equity prices should tell Trump everything he needs to know. It underlines a point his critics have made since he singled out the stock market as his lodestar: The stock market is not the economy.

Even counting those indirectly invested through 401k accounts, fewer than half of Americans own stock. A significant bump in wages means far more people. Bloomberg’s Joe Wiesenthal floated that Trump should embrace the tension between capital and labor highlighted by the dynamic:

Wiesenthal tweeted “Trump should really lean into the market selloff. Pitch it as the elites freaking out that workers are getting higher wages.”

Along the same lines, The New York Times’s Neil Irwin marshals the evidence the selloff indicates strengthening fundamentals:

“Frequently when investors become more pessimistic about the economy, stocks fall and the yield on bonds falls as well. That pattern happens because a weaker economy implies not just lower corporate profits (hence the falling stock indexes) but lower inflation and continued low interest rates from the Federal Reserve (which implies bonds are more valuable and their yield should fall). But that hasn’t been the pattern in this downturn. During the stock market swoon on Friday, the yield on 10-year Treasury bonds rose sharply. Bond market measures of future inflation rose.

“This stock market sell-off seems rooted in a form of optimism - that employers will have to pay higher wages, cutting into profits, and that higher inflation will cause the Fed to raise rates faster than had been assumed. Throw in some worry that markets were getting a little overheated and you have a recipe for the downturn we’ve just witnessed. In other words, this bad news for stock investors seems to be driven in part by good news for workers.”

The impact of the tax cuts will help determine what happens in long-term. The Trump administration has joined congressional Republicans in flogging their only major legislative accomplishment to date as an economic game changer, citing reports that companies are planning major new investments in the United States and passing their windfalls along to workers in the form of bonuses and higher pay.

Scott Minerd, global chief investment officer for Guggenheim Partners, calls it the start of a virtuous cycle that will put more money in the hands of consumers, who will spend it, which will drive up corporate profits, pushing stock prices higher. “But at the heart of it, it’s excessive fiscal stimulus that will be a catalyst forcing the Fed to be more hawkish than advertised,” he tells me.

The tax cuts are also prompting the federal government to roughly double its borrowing this year, to $1tr, potentially crowding out private investment and driving up interest rates - a development that could lead the project to undermine its own benefits, as Business Insider’s Josh Barro writes.

Wall Street economists warned about this at the end of last year, as Republicans were putting the finishing touches on their tax bill. “After a large-scale tax cut, we struggle to see another catalyst to make investors even more optimistic. And such a surprise opens the door to tighter monetary policy,” Morgan Stanley economists wrote at the time.

And the market just gave back all its post-tax cut gains.

For Trump, that just means he has a new case to make.

—Bloomberg/Washington Post Service

Published in Dawn, February 7th, 2018