Yet another basic problem with linking stock market performance to economic policy success arises from the stock market's behavior over the last couple of months. If the initial Trump bump in stock market prices in the months immediately following his election last November was the result of markets anticipating a large tax cut and increased infrastructure spending, why have markets not retraced their steps since then? After all, hopes of an early tax cut and of large public spending increase have now faded as Trump's political troubles have increased and his legislative agenda has stalled.
The truth of the matter is that stock market prices are driven by many factors that oftentimes have very little to do with underlying economic fundamentals. As such, they are not a very useful measure of how successful an administration's economic policies have been. Rather, to assess the relative success of a president's economic policies, one has to look to indicators of how the economy might actually have grown and how employment might have increased during that president's tenure. Judged by gross domestic product growth or the increase in employment in the first half of this year, the relative success of Trump's policies appear to have been not very different from those of his predecessor. Over the past six months, the economy has continued to recover at the slowest pace in the post-war period, while employment growth has continued to be sluggish.
A more plausible explanation of the stock market's buoyancy during both the Obama and Trump administrations is the unprecedented amounts of liquidity created by the Federal Reserve and the world's other major central banks. An indication of the explosion of global liquidity is the fact that over the past eight years, the combined balance sheet of the world's major central banks has increased by a staggering $10 trillion. This burst of liquidity would go far to explain the fact that it has not just been the U.S. stock market that has been buoyant. Rather, we have had a synchronized increase in stock market prices across most of the globe.
Looking ahead, it appears that the world's major central banks might now be readying themselves to start removing the punch bowl that has allowed the global stock market to keep rallying these past few years. The Fed has already started to raise interest rates from their extraordinary low levels, albeit very gradually, while Fed Chair Janet Yellen has intimated that it might soon start unwinding its bloated balance sheet. Meanwhile, noises coming out of the European Central Bank, the Bank of England and the Bank of Canada suggest that all of these central banks might soon start following the Fed in beginning to normalize their monetary policies.
It seems implausible that stock market prices will remain as elevated as they are today once the process of monetary policy normalization by the world's major central banks gets seriously underway. Indeed, they could very well be in for a big correction. For which reason, Trump supporters might want to think twice before being as vocal as they are today that stock market prices are a reliable measure of the success of a president's economic policies. When stock prices start falling, will Trump supporters really want to use those prices as a measure of the president's relative economic success?