If you want the bull market to last, root for President Trump to deliver
© Getty Images

Many Americans would agree there is a massive amount of uncertainty with respect to the Trump presidency. In the economic sphere we could get corporate and individual tax cuts, increased infrastructure spending, and lessened deregulation. Yet, we might not see any significant movement on any of these fronts.

The recent failed attempt to repeal ObamaCare has led many stock market analysts to reevaluate their assessment of a Trump presidency. They have lowered their expectations regarding his ability to deliver on all or some of his market-friendly election promises. Many opinion pieces have been penned suggesting that the market advance has been way too optimistic and that a pullback is highly likely given the recent trajectory of his agenda.

ADVERTISEMENT
As President Trump is approaching the end of his first quarter in office, pundits point to the significant divergence between hard economic data — such as gross domestic product (GDP) growth, consumer spending, and corporate earnings — and soft economic data — such as consumer sentiment and confidence indices. The hard economic numbers show little improvement, while the soft data paints an entirely different picture.

 

Stock market naysayers point to the fact that hard data shows that economic growth isn’t currently accelerating. In fact, the expected short-term growth path is consistent with the end of the Obama years. Consensus forecasts of first quarter GDP growth is around one percent on an annualized basis.

On Friday, the U.S. Commerce Department announced that consumer spending rose, but at a lower rate than analysts had forecast. Like a petulant child many market pundits expect immediate gratification. “What have you done for me lately?” is the mantra.

Conversely, consumer sentiment is much stronger. Earlier this week, the Conference Board reported that its index of consumer confidence in March rose to its highest level since December 2000. Similarly, the University of Michigan consumer sentiment index improved in March and is near the strongest it has been in decades. People are simply more optimistic. The election has unleashed animal spirits.

Increased optimism can fuel economic growth. When people’s investment accounts have risen they feel wealthier and tend to loosen their purse strings. This wealth effect can serve as a strong catalyst for economic growth. Never underestimate the power of optimism in the financial markets.

Simply because there is a divergence between concurrent hard and soft economic data, doesn't mean that those indicators are incongruent. The stock market, and financial markets in general are very forward looking. While we don’t see much movement in hard economic data in the short-run, that doesn’t mean we won't see some evidence down the road.

Economists and investors alike need to exercise a little patience before passing judgment on the impact of a Trump administration on the economy and the financial markets. At some point, Trump will have to deliver the goods. If he doesn’t, market participants rightly will be asking, “Where's the beef?”

Robert R. Johnson, PhD, CFA, is president and chief executive officer of the American College of Financial Services. He is co-author of Strategic Value Investing, Invest with the Fed, and Investment Banking for Dummies.


The views expressed by contributors are their own and are not the views of The Hill.