Might Trump’s actions depress stock prices?

David MoonBlog

A number of my football teammates in college regularly prayed for victory. I always assumed that God didn’t care if we beat Auburn, but in hindsight, I realize that Reggie White was simply connecting two topics about which he was both knowledgeable and passionate – then ascribing some causality between the two.

Investors do it every day, connecting their beliefs (about politics, not prayer) to their expectations (about investments, not football.)

In the eight years following Barack Obama’s election, the S&P 500 increased an average of 12 percent annually. Since Donald Trump’s election, the S&P 500 has increased 12 percent annually. Wall Street doesn’t prefer Democrats, Republicans, career politicians or real estate developers. It prefers earnings.

Look at a chart of corporate earnings and stock prices. It isn’t a perfect relationship, but it’s pretty close. (If you don’t have a source for the chart, let me know; I’ll send it to you.)

Earnings are determined by a company’s revenues and its expenses. That’s it. Revenues and expenses are affected by all sorts of things, most of which are completely unrelated to Congress or the president. Tax policies are one exception, although, at best, additional government spending financed with increased borrowing simply “steals” economic activity from the future.

For a moment, assume that Donald Trump is the worst president in U.S. history. (For many readers, this exercise is quite easy.) Whether Trump is a banal idiot, an evil genius or some combination, both the economy and the stock market have done well during his time in office – so far. Eventually, however, stock prices will decline, and the economy will enter recession. When it does – even if this happens after Trump leaves office – about half of Americans will blame it on him. The other half will blame it on Nancy Pelosi or Hillary Clinton’s emails.

But what if Trump plunges the U.S. into war? Since 1890 the U.S. has quasi-officially been in seven wars: Spanish-American, World War I, WWII, Korean, Vietnam, Gulf and Iraq. The human cost of war is massive and tragic; more than 625,000 Americans were killed in those seven wars. The stock market, however, actually increased during five of them – which is about what one would expect, given that the stock market has historically increased in about 75 percent of all years.

We tend to predict that for which we root. People who favor the winning politicians think things will be great; supporters of the losers tend to think things are going to hell. One problem with viewing investment decisions through this political prism is that it can leave you on the sidelines for extended periods. Seven of the most recent 14 presidents were Democrats; seven were Republicans.

David Moon is president of Moon Capital Management. A version of this piece originally appeared in the USA TODAY NETWORK.