Since the beginning of 2017, market nerds everywhere have watched in awe as the Dow Jones Industrial Average continued to rise, month after month. According to Fred Impert from CNBC, the Dow rose by over 5,000 points during the past calendar year.
Thanks to President Donald Trump’s Twitter usage, this info was shared with tons of people who might not normally pay attention to the day-to-day market movements.
Trump was adamant about touting the rise of the stock market this past year, as he has pointed to it being a key indicator of his successful economic policies. Unfortunately, Trump is going to find this to be a short-sighted strategy for highlighting his success in office. Former President Barack Obama’s experience with discussing the stock market should serve as a good example of why it is a mistake for a president to lean on the market as a barometer of economic success.
According to a Politico article by Jason Furman, in March of 2009, Obama commented on how buying stock could be beneficial for people, as long as they had a “long-term perspective on it.” He was almost immediately lambasted for seeming to step outside of his role as president, acting like some type of venerated stockbroker. From then on, Obama and his economic advisors decided to stay away from commenting too much on the state of the stock market. Furman noted how this is usually the smarter path, because of the many ways this can backfire, both economically and politically.
From the economic side, it is somewhat disingenuous to point to the stock market as a reflection of true economic success. This is because there are plenty of people who do not hold any equity investments, and even when the values of equities increase for those invested in the market, it is not directly related to other economic indicators.
Those other factors, such as wages and jobs, often have a more direct effect on the lives of the average American. In fact, as Furman also pointed out, the slide in the markets over the past week and a half came after the U.S. jobs report on Feb. 2 indicated significant 12-month wage growth.
Politically, it is better for presidents to avoid claiming credit for the rising stock market because, invariably, the market will fall again. They then find themselves with egg on their faces, even though the president can only have a limited, if any, effect on the direction of the market.
Of course, I would also caution critics of Trump to be careful here. It is just as foolish to ascribe blame for a falling stock market to the president, as it is to allow him to take full credit for its rise.
There is also a third and final reason I recommend both the president and the novice market-watcher avoid paying too much attention to the Dow Jones: contrary to what some people think, the Dow Jones is not the index most accurately measuring the U.S. stock market.
According to a piece on Investopedia by David Floyd, the Dow is a collection of a mere 30 companies. Unlike the S&P, all of the companies in the Dow are weighted. For instance, if one of the stocks in the Dow goes up by $1, the index itself increases by 6.89 points. Thus, even small increases in the price levels of companies in the Dow can have a large effect on the point increase.
So, if the president were to somehow come across this column, I would urge him to be careful going forward on taking credit for the movements in the stock market. It is far from the best way to tout the strength of the economy, and he will likely pay political consequences for continuing to focus on the Dow.
But really, who am I kidding? I probably have several more years of seeing Trump tweet about the great and powerful Dow Jones, to which I can look forward.
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Presidential success should never be tied to the stock market
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