Americans are pumped up right now. On Tuesday, the Conference Board reported that consumer confidence had soared to the highest level since 2000. Employment and income expectations are lofty. Inflation isn’t striking fear into many people.
The euphoria has a partisan bent. The University of Michigan’s reported a record confidence gap between Democrats (who are bracing for a new recession) and Republicans (who, no joke, expect job gains at a pace that would take the unemployment rate to zero).
And that optimism is carrying over to how the stock market is viewed: 47 percent of respondents expect share prices to rise from here, the most since January 2000 -- but just two months later, the dot-com bubble burst.
Are we headed for a repeat of that disappointment?
Much depends on whether President Donald Trump can actually push through his legislative agenda -- the core reason stocks have been soaring since Election Day. GDP growth remains tepid, with the Atlanta Fed currently seeing just 1 percent growth for the first quarter. Earnings growth has stalled as indicated by “whole economy’ metrics. And the “hard” economic data, such as retail sales, have been weak at best.
Instead, stock valuations such as price-to-earnings multiples have stretched entirely on anticipation of big legislative changes like tax reform (lower personal and corporate rates), deregulation and infrastructure spending.
But after last week’s failure to even bring health insurance reform legislation to a vote in the House of Representatives following the intra-GOP warfare over the Trump-supported bill, doubts are growing about the possible success of a policy pivot to tax reform.
Without a positive outcome, current stock values look unsustainable: The only times the current Shiller-PE ratio, which smooths corporate earnings growth over a 10-year period, has been exceeded is when the market was heading into the 1929 and 2000 bubble tops. Time is short as well: Should Mr. Trump and Congress be unable to pass a budget bill soon, the country faces a shutdown at the end of April.
And the debt ceiling looms later this year.
Indeed, we could already be seeing very early signs that this confidence whirlwind -- powered by political hope and reinforced by stock market gains -- could be ending.
Stocks, while still very near record territory, struggled in March and logged their longest losing streak since 2011 through Monday’s session. And the 244-point loss in the Dow Jones industrial average on March 21, as “Trumpcare” stalled, was the largest one-day decline since October.
As a result, Gallup’s weekly tracking poll of U.S. economic confidence rolled over to the lowest level since Election Day as the assessment of current economic conditions suffered its largest drop since the October 2013 government shutdown (chart above).
And here’s the kicker: Gallup noted that Republicans suffered the largest drop in confidence amid the party’s infighting over health insurance reform. It’s a sign that even after vanquishing the Democrats in November, President Trump’s “Make America Great Again” agenda could still be frustrated.
Gallup warns that confidence could quickly erode further if Trump’s supporters -- those Americans who have enjoyed the largest surge in optimism since November -- fear he’ll be unable to keep his campaign pledges and “lose faith in [his] negotiating prowess.”
To avoid that, Mr. Trump, author of “The Art of the Deal,” will need to quickly get something through Congress and show that Washington’s gridlock -- which flustered President Obama for six of his eight years in office -- can be broken.