The Trump stock market rally: Don't thank Trump

When Donald Trump won the White House 12 months ago, the stock market took off. And the president often takes credit for that. In a recent tweet, he attributed the ongoing rally to "great confidence" in his administration's policies.

The truth, though, is that the president -- indeed, any president -- has only limited powers to affect the market, which is driven more by corporate earnings and economic forces.

"In the first few months" of Mr. Trump's presidency, said Garrett Oakley, a financial planner with online financial adviser Betterment, investors were excited about Mr. Trump's ambitious plans for tax cuts and huge public works projects. "But that became priced in," meaning the thrill faded after nothing happened and investors turned elsewhere for inspiration.

To be sure, post-election rallies aren't exceptional. In the 12 months after Mr. Trump's 2016 victory, the S&P 500 rose 21.1 percent, LPL Financial research shows -- putting his initial year in third place behind John F. Kennedy in 1961 (up 28.4 percent) and George H.W. Bush in 1989 (21.7 percent). 

The rally predates the Trump presidency

Indeed, with a few hiccups, the market has been on an ascending trajectory since March 2009, at the outset of Barack Obama's administration, and the so-called "Trump bump" is the just latest leg upward. Stock valuations, as measured by the 12-month forward price-earnings multiple, have been "roughly constant for the past two years," said Nicholas Atkeson, a founding principal of Delta Asset Management. 

Oddly enough, Mr. Trump's lack of legislative success may have helped the market, said Jeffrey Sherman, deputy chief investment officer at DoubleLine Capital. In an interview with Yahoo Finance, he noted: "Markets don't like change. And for that I'll give the president credit that he really hasn't changed much thus far, at least when it comes to financial and fiscal policy." 

The tax cut promise has had little impact

The House GOP tax plan, endorsed by the Trump White House, proposes immediately dropping the corporate tax rate to 20 percent from 35 percent, which is one of the highest among major economic powers. However, getting a tax plan through Congress is a Sisyphean task. The stock market slid Thursday on fears that corporate tax cuts will be delayed until 2019, a feature of the just-announced Senate Republican plan.

Michael Underhill, chief investment officer at Capital Innovations, has charted four times in the past 12 months when a tax bill generated a lot of news coverage -- and each time, stocks climbed. But when that attention faded, the upward momentum did, too.

The market's advance is led primarily by tech stocks. Perhaps Mr. Trump's goal of luring back corporate cash stashed abroad by lowering US tax rates has heartened tech investors -- a lot of that offshore money belongs to tech titans like Apple (APPL). 

Trouble is, no one can be sure that the Republican tax plan, which contains a provision to repatriate the overseas cash, will pass. The GOP's failure to repeal Obamacare earlier this year seems, to many, a harbinger for the party's legislative prospects.

What if the tax plan fails? "A tax cut is built into current prices," said Sam Stovall, chief investment strategist at research firm CFRA. "If no tax cut occurs, we'll see that the market is overvalued by 10 percent, and there could be a correction," with stocks falling that amount. 

Federal policy appears to have little or no effect lately on market leaders

There's compelling evidence that Mr. Trump' proposals are of marginal relevance on Wall Street these days. Taking the top 10 performers in the S&P 500 this year, CNBC commentator Jim Cramer said Wednesday on his "Mad Money" program that Washington developments were divorced from their rises.

Semiconductor maker Nvidia (NVDA), for instance, has seen its shares double in price in 2017, amid high demand for its chips from the burgeoning data center business. In its third quarter, the company reported Thursday, earnings rose 54 percent. 

Or take aerospace giant Boeing (BA). It has had a stock boost of 67 percent this year, as it delivered a record number of commercial airplanes. Its third-period operating earnings were up 18 percent. While Boeing benefits from Mr. Trump's planned military expansion, Cramer highlighted the company's surge in commercial orders, the bulk of its business -- with some, to the president's dismay, coming from Iran.

Perhaps the market as a whole has benefited psychologically from the perception that Mr. Trump has a more business-friendly administration than that of his Democratic predecessor. He has eliminated or softened numerous regulations. Still, as Delta's Atkeson pointed out, while "removing some regulatory burden by executive order, it's almost impossible to quantify the effect of this."

And looming over everything is Mr. Trump's low public approval rating, which threatens to lessen his ability to get his agenda passed.

Strong earnings, not Washington, are propelling the market

The earnings picture is heartening, and it's corporate profits that classically power stock prices. Earnings growth, according to research group FactSet, should keep climbing, with an estimated 5.9 percent in the recently completed third quarter, 6.2 percent in the fourth, then 6.4 percent and 6.3 percent in 2019's first two periods. "The market this year has been an earnings story, not a Trump story," Delta's Atkeson said.  

The boost in US corporate earnings stems in large part from the pickup in global economic activity. The early-2016 resurgence in oil prices, after a painful two-year slump, did much to spur commodity prices in general, a boon to emerging markets. Europe appears to have pulled out of the debt crisis harming its southern tier: Spain, Portugal, Italy and above all Greece. Even long-suffering Japan is coming back to life.

Presidents often take credit for bull markets and strong corporate profits, but any fiscal policies they enact -- and Mr. Trump hasn't enacted any yet -- take a while to kick in. Aside from lower taxes, the second big Trump proposal, an infrastructure build-out, appears to be shelved for now. And presidents have no control over monetary policy, which is the province of the Federal Reserve. 

Stock are rallying worldwide, which has nothing to do with Mr. Trump

After Thursday's pullback, the S&P 500 is still ahead for the year by 15.5 percent. But numerous foreign bourses eclipse it -- for example, those in Italy (up 18 percent), India (25 percent), Japan (20 percent) and Brazil (21 percent). 

As president of the US, Mr. Trump obviously has little say in how foreign investors act. But the overall takeaway is that this year's robust equity picture is a global phenomenon that no mere mortal, even the world's most powerful person, can control.

  • Larry Light

    Larry Light is a veteran financial editor and reporter who has worked for the Wall Street Journal, Forbes, Business Week, Money, AdviceIQ and Newsday.