A week ago tonight, President 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 $2 trillion in paper value since its Jan. 26 peak. And on Monday the Dow Jones Industrial Average dropped 4.6 percent, 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 U.S. 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:
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.
— Benjy Sarlin (@BenjySarlin) February 5, 2018
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 2.9 percent — a pickup (the most since 2009) that will nonetheless eat into corporate profits — as inflation also ticked up.
The fact that swelling paychecks 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 401(k) accounts, fewer than half of Americans own stock. A significant bump in wages means far more to far more people. Bloomberg’s Joe Wiesenthal floated that Trump should embrace the tension between capital and labor highlighted by the dynamic:
Trump should really lean into the market selloff. Pitch it as the elites freaking out that workers are getting higher wages.
— Joe Weisenthal (@TheStalwart) February 5, 2018
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 $1 trillion, 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:
The Dow has now erased all the gains made since the GOP tax cuts were signed into law in December https://t.co/Sk9z3Phbi7
— Nick Timiraos (@NickTimiraos) February 5, 2018
For Trump, that just means he has a new case to make.
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STOCK ROUNDUP, AMERICAN CARNAGE EDITION:
— Remain calm. The Post’s Heather Long: “The stock market dip looks like an overdue reality check on how high prices were on Wall Street. That’s healthy. The decline of 1,175 points on Monday is the biggest single-day point drop in history, but in percentage terms, it doesn’t even make the top 50. The U.S. economy also still looks to be in good shape. Yes, there are concerns about inflation, but they have yet to materialize… We all need to adjust our expectations: On the upside, we’ll hopefully see higher wages for many Americans. On the downside, stock prices probably won’t be as insanely good.”
From WSJ’s Greg Ip:
1. Everyone expected a correction.
2. The market always moves in a way to maximize the number of wrong forecasts.
3. Therefore this correction is going to a) be way worse than everyone expects or b) disappear before you know it.
— Greg Ip (@greg_ip) February 5, 2018
— Today’s open will be messy. CNBC’s Patti Domm: “Stocks looked set for another rocky opening and a volatile trading day Tuesday. Stock futures slid into negative territory in Monday evening trade: Dow futures were down 826 points, and S&P 500 futures were lower by 76.5 points as of 11:25 p.m. ET. The implied open for the Dow, based on futures, was a decline of 1,203.75. But during Tuesday’s early hours, U.S. futures pared some of their sharp declines. Around 3:45 a.m. ET on Tuesday, Dow futures reversed losses to rise some 77 points; with the Nasdaq and S&P 500 futures also recovering somewhat. However, Dow futures still implied a negative open of 300 points. Futures are volatile and late night prices may look far different from stocks at the opening bell.”
— Global tremors. The Post’s Emily Rauhala and William Booth: “Global markets fell sharply on Tuesday following a volatile day in U.S. trading, renewing questions about whether the long-running global stock rally is heading for a rout and potentially testing President Trump. The hard tumble began Tuesday in Asia. Japan’s Nikkei stock index closed down nearly 4.7 percent, recovering from a precipitous 7 percent plunge earlier in the day. Hong Kong’s Hang Seng Index closed down 5.1 percent, while Australia, Korea and China also lost ground. Minutes after the European markets opened, there were sharp declines across most sectors in a morning sell-off. The Stoxx 600 index, which tracks Europe’s largest companies, fell by more than 2 percent in the first hour and Frankfurt’s Xetra Dax 30 sunk 3.5 percent. London’s FTSE 100 also lost 3.5 percent in opening trading, with banks and financial stocks hit hardest.”
— The bull case. CNBC’s Kellie Ell: “UBS strategist Keith Parker said this is a good opportunity to buy and points toward a market rally. ‘I still see values opening up,’ Parker told CNBC on “Fast Money” shortly after the markets closed on Monday. ‘We’ll see where markets shake out before we get in and buy anything.’ Parker said he expects as much as a 5-percent pullback before markets start to shake out.
The bear case. Bloomberg’s Devin Banerjee: “Equity markets could fall as much as 20 percent this year, Blackstone Group LP President Tony James said. ‘Every historic norm says that stocks are very, very fully valued,’ James said Monday in an interview on CNBC, adding that the market decline could be 10 percent to 20 percent… The U.S. economy has been picking up for a while and further stimulus from recent tax cuts may not have been necessary, James said. ‘If you’re worried about interest rates and inflation, the stimulus could be the thing that tips us over into a rate spike,’ the billionaire said.”
(Goldman says it could go either way.)
From NBC’s Carl Quintanilla:
— How it stacks up historically. NYT’s Stephen Grocer and Peter Eavis put things in perspective: “There have been far blacker Mondays… Monday’s plunge was far less impressive on a percentage basis. The Dow’s fall ranked as its 100th biggest, while the S. & P. 500’s slide was the 127th biggest in the index’s history, according to S & P Dow Jones Indices.”
From a former adviser to Ronald Reagan and George H.W. Bush:
The stock market just noticed that an unstable lunatic is president of the United States.
— Bruce Bartlett (@BruceBartlett) February 5, 2018
From CNBC’s John Harwood:
increase in Dow Jones Industrial Average from president’s Inauguration Day to Feb 5 of following year:
— John Harwood (@JohnJHarwood) February 5, 2018
— Blame the robots. Bloomberg’s Sarah Ponczek and co.: “You didn’t need an engineering degree to tell something was amiss Monday. While it’s impossible to say for sure what was at work when the Dow Jones Industrial Average fell as much as 1,597 points, the worst part of the downdraft felt to many like the machines run amok. For 15 harrowing minutes just after 3 p.m. in New York a deluge of sell orders came so fast that it seemed like nothing breathing could’ve been responsible… Observers looking for an electronic villain trained most of their attention on the roughest part of the tumble, a 15-minute stretch starting about an hour before the close. That’s when an orderly selloff snowballed, taking the Dow from down about 700 points to down a whopping 1,600. It quickly recovered.”
— World’s richest lose big. Bloomberg’s Krista Gmelich and Jack Witzig: “A plunge in U.S. stocks Monday cut the fortunes of the world’s 500 richest people by $114 billion as the optimism over tax cuts that fueled January’s gains gave way to worries about inflation. Berkshire Hathaway Inc. Chairman Warren Buffett, the world’s third-richest person, was hardest hit, losing $5.1 billion, according to the Bloomberg Billionaires Index. Berkshire is the biggest shareholder of Wells Fargo & Co., which plunged 9.2 percent, the most in the S&P 500. Buffett, 87, was one of 18 billionaires in the Bloomberg ranking to lose more than $1 billion on the day. Facebook Inc. CEO Mark Zuckerberg’s fortune tumbled by $3.6 billion, the second-biggest decline.”
— Happy Day One, Chairman Powell. NYT’s Binyamin Appelbaum: “Jerome H. Powell took the reins of the Federal Reserve on Monday with a depleted board and a list of challenges that has suddenly expanded to include a second day of stock market wobbles. Mr. Powell is unlikely to respond to the decline in stock prices unless it worsens dramatically. In remarks after his swearing-in as Fed chairman, he emphasized the health of the economy. ‘Today, unemployment is low, the economy is growing and inflation is low,’ Mr. Powell said in a brief video statement that the Fed published on its website. ‘Through our decisions on monetary policy, we will support continued economic growth, a healthy job market and price stability.'”
Some market analysts chalked up the stock turbulence in part to general investor uneasiness about what the Fed handover will mean for delicate decisions on monetary policy. Indeed, market choppiness historically follows regime change at the central bank, as this chart from LPL Financial shows:
Bloomberg Gadfly notes Powell is the richest Fed chair in history:
— Bloomberg Gadfly (@gadfly) February 5, 2018
MONEY ON THE HILL
— Defense spending boost complicates funding bill. The Post’s Erica Werner and Mike DeBonis: “House Republican leaders are proposing a long-term boost to military funding in a bill that would give other federal agencies only a short-term extension of current spending levels, a move that stands to heighten tension with Democrats and complicate plans to keep the government open past Thursday. House Speaker Paul D. Ryan (R-Wis.) pitched the plan to his GOP colleagues in a closed-door meeting Monday. The bill, set for a vote on Tuesday, would increase Pentagon funding by about $30 billion, to $584 billion, breaking existing spending caps as well as making funding available through September. The rest of the government would continue to be funded at 2017 levels through March 23.”
— Trump accuses Dems of treason. NYT’s Mark Landler: “Trump on Monday accused Democrats who did not clap during his State of the Union address of being un-American and even treasonous. His remarks came in a rambling, discursive speech at a factory in Ohio, during which he celebrated his revival of the American economy as the stock market plummeted by more than 1,000 points. ‘Can we call that treason?’ Mr. Trump said of the stone-faced reaction of Democrats to his speech. ‘Why not? I mean, they certainly didn’t seem to love our country very much.'”
— Tax lawyer in line for IRS. WSJ’s Richard Rubin and Peter Nicholas: “Trump will nominate Charles Rettig, a California tax lawyer, to run the Internal Revenue Service, a person familiar with the matter said Monday. If confirmed by the Senate, Mr. Rettig will take one of the most thankless jobs in Washington…Mr. Rettig’s selection departs from the recent trend of IRS commissioners. The most recent Senate-confirmed commissioners— John Koskinen, Douglas Shulman, Mark Everson and Charles Rossotti —weren’t career tax experts when they were picked.”
— Trump lawyers urge against Mueller sitdown. NYT’s Michael Schmidt and Maggie Haberman write the legal team’s advice raises “the specter of a monthslong court battle over whether the president must answer questions under oath. His lawyers are concerned that the president, who has a history of making false statements and contradicting himself, could be charged with lying to investigators. Their stance puts them at odds with Mr. Trump, who has said publicly and privately that he is eager to speak with Mr. Mueller as part of the investigation into possible ties between his associates and Russia’s election interference, and whether he obstructed justice… Refusing to sit for an interview opens the possibility that Mr. Mueller will subpoena the president to testify before a grand jury, setting up a court fight that would dramatically escalate the investigation and could be decided by the Supreme Court.”
— House panel clears Dem memo. The Post’s Karoun Demirjian and Devlin Barrett: “The House Intelligence Committee voted unanimously Monday to release a Democratic rebuttal to GOP accusations that the FBI misled a secret surveillance court… Trump now has five days to decide whether the information will become public. The vote means the political rancor roiling Congress is likely to continue. Each party has accused the other of misrepresenting sensitive intelligence surrounding the ongoing probe into whether any Trump associates coordinated with Russia to interfere in the 2016 presidential election.”
— Wells Fargo chief sees year-end fix. The Hill’s Sylvan Lane: “Wells Fargo CEO Timothy Sloan said Monday he expects the Federal Reserve to lift penalties put on his bank by the end of the year. Sloan said on Fox Business that Fed’s stunning decision to oust four Wells Fargo board members and freeze the bank’s growth ‘a disappointment,’ but not a fatal blow. ‘We expect to have this cap lifted because again, all of the activities that the Fed would like us to improve on are the same ones that we would like to improve on,’ Sloan said. ‘And we believe it’s likely that the asset cap could get lifted by the end of the year.’
— Bitcoin hits lowest point since November. CNBC’s Evelyn Cheng: “Bitcoin dropped to its lowest in more than two months. The digital currency fell to a low of $6,147.30, its lowest since mid November, according to CoinDesk, whose bitcoin price index tracks prices from four major exchanges. On the day the cryptocurrency was down more than 11 percent, according to CoinDesk. The site measures bitcoin based on Coordinated Universal Time — currently the same time zone as the U.K. With that decline, bitcoin has now lost more than 55 percent for the year so far.”
The problems are real. NYT’s Nathaniel Popper: “Hackers draining funds from online exchanges. Ponzi schemes. Government regulators unable to keep up with the rise of so-called cryptocurrencies. Signs of trouble have appeared at nearly every level of the industry, from the biggest exchanges to the news sites and chat rooms where the investment frenzy has been discussed. On Tuesday, the leaders of the two main regulatory agencies in the United States that oversee the technology, the Securities and Exchange Commission and the Commodity Futures Trading Commission, are to testify before the Senate banking committee about their efforts to police virtual currency markets.”
Bloomberg’s Joe Wiesenthal:
Bitcoin and stocks bottomed at almost the exact same moment. Don’t know what to make of it. pic.twitter.com/SBmxnRoDgE
— Joe Weisenthal (@TheStalwart) February 5, 2018
— SEC, CFTC to call for regulation. Bloomberg’s Benjamin Bain and Joe Light got an early look at the testimony the regulators will give before the Senate Banking Committee today: “Commodity Futures Trading Commission Chairman J. Christopher Giancarlo and Securities and Exchange Commission Chairman Jay Clayton will call attention to potentially dangerous gaps in rules for trading digital currencies… ‘The currently applicable regulatory framework for cryptocurrency trading was not designed with trading of the type we are witnessing in mind,’ Clayton said in his prepared remarks. ‘As Chairman Giancarlo and I stated recently, we are open to exploring with Congress, as well as with our federal and state colleagues, whether increased federal regulation of cryptocurrency trading platforms is necessary or appropriate.'”
From The Post’s Christopher Ingraham: “The effects of 137 minimum wage hikes, in one chart:“
- Treasury Secretary Steven Mnuchin testifies before the House Financial Services committee for a hearing on “The Annual Report of the Financial Stability Oversight Council.”
- The Inter-American Dialogue holds an event on “The United States and Mexico in the Trump Era.”
- The House Agriculture Committee holds a public hearing on “The State of the Rural Economy.”
- SEC chairman Jay Clayton and CFTC chairman J. Christopher Giancarlo will testify during a Senate Banking, House and Urban Affairs Committee hearing on “Oversight Role of the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission.”
- The Senate Judiciary Committee holds a hearing on “Fighting Illicit International Financial Networks Through Transparency.”
- The Senate Health, Education, Labor and Pensions Subcommittee on Primary Health and Retirement Security holds a hearing on the gig economy and retirement savings.
- The Asia Society holds an event on “The Broken Multilateral Trade Dispute System” on Wednesday.
- The Hudson Institute holds an event on “The Chinese Economics and Trade Challenge to the West: German and U.S. Perspectives” on Wednesday.
- The Urban Institute holds an event on the role of financial technology in financial service markets on Thursday.
- The Washington International Trade Association holds an event on the congressional trade agenda on Friday.
- The Peterson Institute for International Economics hosts an event on “Charting Europe’s Path Forward” on Feb. 13.
From The Post’s Tom Toles:
“I love equipment, and I love workers” Trump said in a speech in Blue Ash, Ohio:
During his speech, Trump called Democrats’ behavior during State of the Union “un-American:”
Watch Stephen Colbert on Monday’s stock market plunge:
Jimmy Kimmel gets a “visit from White House spokespuppet Kellyanne Conway:”