“It’s the economy stupid” – I’ve heard this quote dozens of times over the years in political parlance. I had attributed it incorrectly to Ronald Reagan and not James Carville, part of Bill Clinton’s 1992 presidential campaign team.
The central tenet of this claim was that the electorate vote with their pockets. Their perception of the economy has a major bearing on the way they vote. Incumbents can point to a strong economy, while candidates will offer an alternative solution that they believe will improve the economy.
This is not an American phenomenon and can often be the case in any election across the globe. What is a little different with President Trump is that he has repeatedly boasted about how much the stock market has risen in his time as president as opposed to the overall performance of the economy.
At Davos in January, he spuriously claimed that the stock market had increased 50% since he was elected and that it would have dropped 50% if Hillary Clinton had been elected. This was met with a mixture of gasps and derision from the audience. The market has undoubtedly increased under his tenure but this is a continuation of an exceptionally long bull run (I won’t delve into the details here as this run has been covered extensively).
However, what we have seen over the past few days is that the stock market is a volatile beast that can’t be controlled or tamed. On Monday, the Dow Jones dropped 1,175 points (4.6%) which was its largest fall in absolute terms ever.
There are numerous theories as to this occurred, ranging from the beginning of a major correction to profit taking by savvy investors.
Regardless of whether it heralds the beginning of something major or not, Trump should heed the warning it offers. The economy consists of a lot more than the Dow Jones Industrial Average.
If Trump stakes his presidential performance to a simple and crude metric measure like this he could swiftly find himself out of touch with an electorate that had become frustrated with the lack of tangible economic progress felt under earlier part of the same bull run under Barack Obama.
To be fair to Trump, he has also focused on job creation as well, although according to some economists that may soon suffer from supply constraints. Equally, his tax reforms have been met with a lot of cynicism from the Democrats who see them as tax cuts for the rich while not offering enough benefits across the spectrum of the labour force.
It’s a long way until the next US presidential election. The current bull run would have to break a lot more records for it to still be going by the time campaign season swings around.
Trump speaks a lot about fake news and how his positions and events are misconstrued. In many ways this has been successful to an extent. However, he will find it a lot more difficult to dismiss a plummet in share prices or a major market correction as simply not true.
By not diversifying his offering and thinking in greater terms than an equity index, Trump may lose the election before the first ballot in the Democratic presidential nominee campaign is even cast.