Since the election, there has been a great deal of exuberance about what some of Donald Trump’s followers and his political surrogates claim is the particular effect his having won the White House, is having on the financial markets. It has been referred to as “Trumphoria”.
On election night, the Dow Jones Industrial Average (DJIA) was at 18,000. When the DJIA hit 20,000 on Christmas Day, which was considered by many observers as a breakthrough number, the talk about a connection between Trump and the upward trend in the markets, spiked as well. In response to Trump’s speech to a joint session of Congress earlier this week – which exceeded everyone’s low expectations, the effect appears to be continuing with another conjuncture – the Dow hitting 21,000.
The excitement is real among a segment of investors. Wizened street insiders are riding the wave of the hype that has lured the small investors in.
In direct correlation to Trumphoria are a series of measurements of sentiment regarding the economy. Traders casually refer to the indicators as “animal spirits” a term coined by storied economist John Maynard Keynes (the father of Keynesian economics), which describes how some investors second guess fact based data and make investing decisions on the basis of ‘gut instinct’. Donald Trump himself, has, over the course of his business career, acted on animal spirits to a much greater degree than he has on quantifiable facts and numbers.
Mary Jo White, who was considered on Wall Street as the hardest hitting attorney in the securities field, grilling Trump in a deposition related to Trump v. Timothy L. O’Brien rattled him to such an extent that he made a remarkable admission:
Q: Let me just understand that a little bit. Let’s talk about net worth for a second. You said that the net worth goes up and down based upon your own feelings?
A: Yes, even my own feelings, as to where the world is, where the world is going, and that can change rapidly from day to day. Then you have a September 11th, and you don’t feel so good about yourself and you don’t feel so good about the world and you don’t feel so good about New York City. Then you have a year later, and the city is as hot as a pistol. Even months after that it was a different feeling. So yeah, even my own feelings affect my value to myself.
Even Trump himself is susceptible to the sway of Trumphoria and it has led him to make business decisions that have been catastrophic – not only to himself, but partners and people he has contracted to work on his projects and then refused to pay when his animal spirits prove erroneous.
Trumphoria is boosting the mood of business people and consumers alike. Gallup’s U.S. Economic Confidence Index has now risen to the highest level that Gallup has ever seen… and the University of Michigan consumer confidence survey has soared to the highest level that has been measured by them since 2005.
Among the remarkable facets of the economic realm of Trumphoria is the manner in which it feeds off of and mirrors the political impact of Trump’s imprecise policy projections. Although there were no specifics from Trump in the speech to Congress on how Trump’s broad policies are going to be implemented – or in the case of the estimated $1 Trillion in infrastructure spending, how it is to be paid for – White House Press Secretary Sean Spicer attributes the acceleration of the stock indices as results of how businesses and investors are interpreting Trump’s comments:
I think you’re seeing not just the Dow react, but manufacturers, business leaders, folks from small and large companies talk about it. And I think that there is a renewed sense of wanting to business, and of economic growth and optimism. You’ve seen it in not just in the indexes on a day-to-day basis as they go up and down, but also in the confidence numbers that show that there is a continued growth in the confidence in our economy and our market and our policies.
There is no way to absolutely predict whether and to what extent, Trumphoria is sustainable over time, but there are a host of factors that should, but are not, raising caution flags. Any discussion between economists or equities traders, when trying to divine the direction of the economy and markets, up, down or sideways, involves what is referred to as “hard data” and “soft data”.
Hard data includes such metrics as earnings reports, productivity, inventories, profits, jobs numbers, price to earnings ratios, etc., – in other words, measurables. Economists call this “efficient markets”, but another description could be rational investing. If you listen to market analysts detailing the hard data, it would seem that the markets are primarily driven by hard data. This is not the case however. If it was, it would be relatively simple to predict the immediate and longer term trends. Economists themselves admit efficient markets are not the exclusive drivers or even the prime drivers of investor behavior.
That trades in stocks and other equities are strongly influenced by soft data, is known as “investor irrationality” or “irrational markets”. Nobel Laureate economist Robert J. Shiller, has authored numerous books describing the phenomenon, including “Irrational Exuberance” and “Bubble Markets”. In an interview with Goldman Sachs‘ Allison Nathan, Shiller outlined his concept of asset bubbles:
“I define a bubble as a social epidemic that involves extravagant expectations for the future. Today, there is certainly a social and psychological phenomenon of people observing past price increases and thinking that they might keep going”.
What more appropriate description of Trumphoria than a ‘social epidemic’? This is where the “soft data” comes into play. Not only investors, but even corporate CEO’s and small business owners make economic decisions on factors that Shiller names as “overconfidence and intuitive thinking” (‘animal spirits’); “story telling” and “herd mentality”.
All of these factors converge with Trumphoria. Trump tells a story to willing and receptive listeners, his story resonates with them because the listener is anxious and simultaneously desperate to hear such a story and the secondary narrative his stories create, drive the “herd mentality”.
In the next in this series of reports on Trumphoria, we will examine the risks of the irrational exuberance surrounding Trumphoria and the factors, including hard data – that will determine whether Trumphoria is a temporary effect on the irrational impulses of market decisions or whether it is likely to sustain this upward momentum over time.