In the run-up to last year’s Presidential election, pundits, economists, and Wall Street analysts agreed on one thing: a Donald Trump Presidency would be a disaster for the stock market. The common wisdom is that markets hate uncertainty. They’re all about prediction, and Trump is unpredictability personified. Citigroup said that a Trump win would send the S. & P. 500 down three to five per cent, and, on Election Day, the hedge fund Bridgewater Associates told its clients that the Dow could fall almost two thousand points-a full ten per cent-if Trump was elected. As the result became clear, these forecasts briefly looked accurate: stock-market futures took a vertiginous overnight tumble. But the day after Trump’s victory markets rebounded, and, as he never tires of boasting, they’ve risen since. The Dow is up more than thirteen per cent, an impressive gain by historical standards.
At first glance, this seems bizarre. Trump’s first five weeks in office have been even more chaotic than expected, and the global Economic Policy Uncertainty Index has spiked to levels unseen in this century. During Barack Obama’s Presidency, many Republicans and economists blamed uncertainty about the Administration’s policies for the slow recovery from the recession. Yet Trump is far more volatile and unpredictable than Obama ever was-risking a trade war with China, vowing to punish companies that move production abroad, calling for a new nuclear “arms race”-and markets are giddy with delight. Businesses are excited, too. A PwC study of private companies saw an “unprecedented” post-election jump in optimism, and, in December, the National Federation of Independent Businesses found that small-business owners were unusually optimistic. The new Administration looks as if it will be a roller-coaster ride. So why are companies and investors keen to jump aboard?
As far as business policy is concerned, there were two Trumps on the campaign trail. The candidate who appealed to the white working class was a blustery populist who promised to tear up trade agreements, bring jobs back to the U.S., and use America’s bargaining power to drive down drug prices. The other Trump was a classic Republican businessman, who vowed to slash taxes, resurrect coal production, and keep Washington from meddling in business. He’d repeal Dodd-Frank, soften other regulations, and curb the E.P.A. Markets have bet that the second Trump will prevail, and so far it looks like they’re right.
Trump has thrown a few bones to Main Street, such as scrapping the Trans-Pacific Partnership (which was more or less dead anyway), but he’s already backing away from populist positions. The commitment to bargaining for lower drug prices didn’t survive a meeting with pharmaceutical executives; Trump came out of it saying that he was opposed to “price fixing.” Meanwhile, he has filled his Cabinet with corporate executives, handed the E.P.A. to a fervent opponent of environmental regulation, and threatened to rescind an Obama regulation making millions of workers eligible for overtime pay. He has launched efforts to dismantle Dodd-Frank and to halt a new regulation requiring financial advisers to act in the best interest of their clients. Agencies have been told that for any new regulation they introduce they have to get rid of two existing ones.
These moves have reassured business not just because they’re corporate-friendly but also because they suggest that Trump will govern as a relatively conventional President. In developed countries, a leader’s policies usually affect the business climate much less than general economic conditions do. Indeed, for all the business complaints about Obama’s actions during the Great Recession, work by the economists Atif Mian and Amir Sufi indicates that uncertainty about his policies had a trivial impact. What really held down hiring was the carnage of the recession and doubts about when things would ever get back on track. Similarly, a 2010 study of businesses in Germany and the U.S. found that businesses base their decisions not on likely government actions but on the health of the wider economy. And right now the economy is looking very good for Trump, even though he spent much of his campaign bemoaning the state of it. There have been seventy-six straight months of job growth. Unemployment has been at or below five per cent for a year. Inflation remains low. Although growth is slow by historical standards, corporate profits are healthy. A business-friendly President and a robust economy are a good combination for investors. In retrospect, the only surprising thing about the market boom is that few predicted it.
Still, in economics there’s a famous distinction, developed by the great Chicago economist Frank Knight, between risk and uncertainty. Risk is when you don’t know exactly what will happen but nonetheless have a sense of the possibilities and their relative likelihood. Uncertainty is when you’re so unsure about the future that you have no way of calculating how likely various outcomes are. Business is betting that Trump is risky but not uncertain-he may shake things up, but he isn’t going to blow them up. What they’re not taking seriously is the possibility that Trump may be willing to do things-like start a trade war with China or a real war with Iran-whose outcomes would be truly uncertain. Trump won the Presidency by shattering norms and bucking expectations. Markets had better hope that he won’t govern the same way.