Economics, Not Politics, Driving Markets
Are President Trump’s agenda and policy initiatives the reason for the stock market’s advance since the election? Many pundits believe so. Yet, while the timing of Trump’s win coincided with the start of the most recent leg of the equity market rally, remember that correlation does not always equal causation. Instead of a “Trump Bump,” we’d suggest that prices have risen in response to an increase in global earnings and job growth.
The chart below shows the J.P. Morgan Global Purchasing Managers’ Index (PMI), a barometer for global economic activity. It clearly indicates that the global economy bottomed in early 2016 and started to accelerate in the early fall—ahead of the U.S. election. We think economics—rather than politics—is the reason for the global market gains, including the 24.7% return for the S&P 500 and the 16.1% gain for the MSCI EAFE from the PMI’s February 2016 bottom through last week.
Not only has the economic picture improved, but one indicator shows conditions are better than had been expected. The Citigroup Global Economic Surprise Index measures actual economic data relative to economists’ estimates. A rising line indicates economic data came in better than expected—and clearly the line has spiked higher over the last several months. As is often the case, it isn’t so much the data itself, but the data relative to expectations, that drives markets up or down.
While political headlines and tweets can be entertaining, we continue to believe that, above all else, earnings and interest rates drive prices. If economic growth is picking up faster than expected, we can assume that earnings growth will follow and that even higher stock prices are a distinct possibility.
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