Larry Kudlow, the Reagan administration economist who advised the Trump campaign, said the White House needs to tout the strength of the U.S. economy as the stock market twists through a spell of volatility.
The Dow Jones Industrial Average, which President Trump celebrated every time it rose another 1,000 points, surged 45 percent after the election to an intraday peak of 26,616.7 last month. The benchmark later fell as much as 10 percent by February 5, erasing gains for the year.
The sell-off was most sudden after the Bureau of Labor Statistics reported strong wage growth for January, triggering fears of inflation and more rate hikes from the Federal Reserve to cool an overheating economy. But the sell-off wasn’t the worst in U.S. history, compared with the crashes in 1929 and 1987.
“During the 1987 crash, Reagan went out there and said that the economy is fundamentally sound. And he was right, and the market rebounded,” Kudlow said on cable channel CNBC. “If I were on the Trump team, I would talk about that. And in fact, the economy is improving.”
Indeed, the White House issued a statement to deflect attention from the market swoon:
"The President’s focus is on our long-term economic fundamentals, which remain exceptionally strong, with strengthening U.S. economic growth, historically low unemployment, and increasing wages for American workers. The President’s tax cuts and regulatory reforms will further enhance the U.S. economy and continue to increase prosperity for the American people."
Kudlow cited recent data from the services and manufacturing industries that showed strong commercial activity as signs of an improving economy.
“With better growth, real interest rates tend to go up, and hence market rates go up,” he said. “It’s a good sign to have rising real rates, but it can cause congestion in stocks.”
Taking credit for market gains is risky for political leaders, and that’s most evident when markets rapidly decline.
“Presidents typically don’t cheerlead the economy,” Ben White, chief economic correspondent for Politico, said. He pointed to Reagan and Obama as examples. “It was a fool’s game to start with, he [Trump] never should have played it. Now, he got stuck with it.’
Kudlow said Trump should point out that a rising market is good for everybody, especially public pensions that are strapped for cash to pay retirees.
“Government unions, including the teacher’s union, who hate Trump passionately are benefiting enormously from the 30 percent rise since the guy was elected,” Kudlow said. “It’s actually helping them bail out their pension funds which are terribly underfunded.”
Last week, Kudlow said investors need to keep an eye on the bond market’s reaction to economic data such as wage growth. Employment surged in January and wages rose the most in more than 8-1/2 years, data from the Bureau of Labor Statistics showed on Friday. The report led investors to expect that inflation will push higher this year as the labor market hits full employment.
Average hourly earnings rose 2.9 percent from a year earlier, the biggest increase since June 2009, compared with a 2.7 percent gain in December. But the average workweek fell to 34.3 hours, the shortest in four months, from 34.5 hours in December.
“The economy is now moving at a much higher growth trajectory, as a consequence principally of the tax reform bill which has been embraced by corporations faster than almost anybody thought possible, including me,” Kudlow said on CNBC. “That means interest rates have to adjust. The Fed may be a little stingier, we’ll see.”
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