It's good when stocks go up
Actually, the stock market is an increasingly good proxy for the economy.
I’ve written a lot in the newsletter about the damaging effects of President Trump’s tariffs on the economy. I’ve also written about the detrimental impact that Elon Musk has had on the government. (There’s a version of DOGE I can imagine supporting … but that’s not the DOGE we got.) I hadn’t gotten around to writing about Trump’s inappropriate pressure on Fed Chair Jerome Powell — but that’s been another place where Trump has dangerously overstepped his boundaries.
So if you’re like me and thought these developments were bad news, we’ve had what I’d consider to be some pretty good headlines this week:
Trump has struck a far more conciliatory tone on tariffs, perhaps concerned by China playing hardball.
Trump also said he has “no intention of firing” Powell.
And in a Tesla earnings call, Musk said he would “significantly” reduce his time on DOGE.
You’re welcome to be skeptical about the durability of these headlines.1 Trump may reverse himself yet again on tariffs, and perhaps on Powell. Tariffs remain high, consumers are terrified, and the chance of a recession is still greater than 50/50.
But when there are indications that bad things have become less likely … that’s good. This isn’t so complicated, you’d think.
Unless you’re Matt Stoller, the research director of the American Economic Liberties Project:
In partisan news outlets, there can be an element of “heads I win, tails you lose” in coverage of Trump2. But that’s not quite what this is. Stoller is hardly a Democratic partisan — he often feuds with liberals of various kinds — so much as a contrarian. Wall Street rallied on this news, and Stoller is (in a slightly complicated way) a critic of Wall Street. Bad people liked these seemingly good headlines; ergo, actually, they must be bad news.
In fact, it’s hard to identify historical examples where stocks improved on what most people would regard as bad news or declined on good news. Pearl Harbor and September 11 led to big selloffs. So did the Kennedy assassination and the beginnings of the COVID-19 pandemic. American equities did experience strong years in 1942 and 1943 as the United States ramped up industrial production after it entered the war. However, stocks gained even more in 1945 following the end of World War II.3
There is one common exception: traders trying to anticipate interest rate changes. On Nov. 1 of last year, for instance, markets rallied after a poor jobs report on the belief that it would encourage Powell to cut rates. The reverse happened on Jan. 10, with the market declining in response to strong jobs numbers that traders believed would make a rate cut less likely. However, most of these contrarian changes are modest and come out in the wash once the Fed makes its rate decision.
The large majority of the time, however, there’s no need for contrarianism. Good news for the markets usually implies good news for the world outside of Wall Street, too.
Furthermore, the correlation between changes in stock prices and the broadest economic indicator — GDP — is reasonably strong and has become stronger in recent years. Let’s look at the data here.