Does the Market Trust Trump?

“Reading market movements—such as the steep rise in stock prices in the early post-election days as well as the subsequent ups and downs—requires a Rosetta stone,” writes Harvard economics professor Sendhil Mullainathan in a recent New York Times article.

An increase in stock prices, he writes, “signals an expected increase in future profits” for investors, but even those who do not own stocks can become more optimistic since in a well-functioning market the interests of companies and consumers track each other. On the other hand, the professor writes, “the stock market can be a poor scoreboard for the economy. Sometimes companies can profit without improving consumers’ lives, or possibly even by worsening them.”

Mullainathan writes that while the post-election rally suggests a widespread belief that the Trump administration will likely loosen regulations, the potential benefit to some businesses’ bottom lines may not be passed on to consumers.

He also highlights the role that traders play in the process: “The capacity of traders to make predictions about future profits is limited.” Despite the increased use of computers, he argues, “markets are, at their root, made up of human traders…Many of the biases of individual traders become broader market biases.”

In conclusion, Mullainathan explains, “Just as the presidential election tells us only who voters believe is good for the country, the market can tell us only what traders believe is good for a company’s bottom line.”