Why Does the Stock Market Keep Going Up?

A great mystery of our time

The Dow Jones Index hits 23,000 for the first time ever. (Brendan McDermid / Reuters)

Two things have been true so far in 2017: The news cycle keeps spiraling downward, and the stock market keeps going up.

Consider a brief review of the year’s chaos. In domestic news, Washington’s legislative machine is even more broken than normal, and President Donald Trump—tweeting furiously, while under investigation for possible collusion and obstruction—has oscillated between sympathy for white nationalists and recklessness toward North Korea. A series of historic natural disasters have ravaged Houston, Florida, the U.S. Virgin Islands, Puerto Rico, and northern California. Abroad, the U.K. is sleepwalking toward divorce with Europe, a crisis with a Middle East ally is brewing, and a missile flew over Japan.

But what observable effect has this cavalcade of chaos had on the stock market? None, really. The S&P 500 is in the middle of one of the strongest bull runs since World War II. The Dow passed 23,000 this week for the first time ever. “I cannot for the life of me understand why the market keeps going up,” Michael Bloomberg said Tuesday in an interview with CBS News.

So, what’s going on? Here are three theories.

1. It’s simple: Corporations everywhere are making a bunch of money.

It’s important to remember that the stock market is not a referendum on the state of liberalism or conservatism. It is not a barometer of moral progress. And it is not a report card on the president of the United States (even if he wishes it were). The stock market is a collective daily wager on the future performance of the nation’s public companies. And they are, to employ a technical term, making a boatload of money right now. In the first quarter of this year, corporate profits reached an all-time high.

Tech is leading the way, with behemoths like Facebook and Google racking up several excellent years in a row. Emerging tech companies—especially those that manufacture semiconductors, such as Nvidia, Micron Technology, and Advanced Micro Devices—have rode the AI/machine-learning wave to double their valuations since Trump's election. But it’s not just tech. Just about any sector you pick—including cars, chemical production, banks, and health care—has seen valuations soar in 2017.

The most obvious explanation for rising corporate profits is that the U.S. economy is well into a long, slow, and steady recovery. Less obvious, perhaps, is that international sales account for nearly half of revenue in the S&P 500. Indeed, Netflix adds about five global subscribers for every one new domestic viewer, and two global manufacturers, Boeing and Caterpillar, have accounted for about one-quarter of the Dow’s 1,000-point jump in the last 10 weeks. So it’s equally important that the global recovery is marching on, with business confidence at a decade-high across the once-moribund economies of the European Union and Japan. Low interest rates from central banks around the world haven’t done much to move inflation, but they’re clearly succeeding in raising asset prices. As well as U.S. markets have done since Trump’s election, stock indices in Europe, Japan, and emerging markets are up even more.

It’s a bit ironic that the global boom is feeding a so-called Trump Bump. On the campaign trail, Donald Trump threatened to start a trade war with China, leading many to assume that global trade would take a hit under his presidency. Instead, the very opposite has happened. In the first half of 2017, world trade grew at its fastest pace in the last five years. In September, the World Trade Organization reported stronger-than-expected growth driven by (guess who?) Asia and North America, precisely the markets most under threat by Trump’s campaign rhetoric.

2. A1 chaos doesn’t drive the business cycle.

“The unbelievably low volatility in a time of massive global uncertainty seems mysterious to me,” Nobel Prize–winning economist Richard Thaler recently said. Indeed, when people like Thaler and Bloomberg express astonishment at the resilience of the stock market in the face of political chaos, they’re suggesting that front-page stories—political crises, geopolitical uncertainty, and natural disasters—ought to move markets.

Maybe they ought to. But do they?

Washington’s dysfunction hasn’t interrupted the metronomic expansion of GDP and payrolls. Saber rattling in Pyongyang hasn’t prevented South Korea from hitting a six-year high in exports. As for natural disasters, the Inter-American Development Bank analyzed the long-run economic impact of catastrophes around the world between 1970 and 2008 and found almost no effect, particularly in developed economies. For example, the 1995 Kobe earthquake in Japan was a terrible tragedy, killing more than 6,000 people. But within a year and a half, the area’s manufacturing economy was operating just 2 percent below its pre-quake trend.

Cembalest / JP Morgan

Finally, the market has clearly learned to shrug off Trump’s Twitter feed. Perhaps the principle of inflation applies here, and an oversupply of presidential bluster has served to depreciate the market-moving power of the bully pulpit.

In general, A1 news is a mixed indicator of stock market performance. While the front pages and homepages of U.S. news organizations have been chaotic, dire, and whiplashing, the business cycle has been the opposite—steady, positive, and nearly boring. “Brexit’s effect on global markets has been much less catastrophic than people assumed, just as the Soviet crises of the 20th century and even 9/11 had sudden impacts that were overtaken by the business cycle,” said Michael Cembalest, the chairman of market and investment strategy at JP Morgan. “The percentage of countries in major expansion mode is about as good as it can get.”

3. There aren’t many obvious signs of bubbles, or causes for imminent corrections.

This isn’t 1987. And it’s not 2007, either.

Unlike the mid-2000s, when GDP growth was buffeted by an unsustainable rise in mortgage debt, this boomlet doesn’t seem to be driven by aberrant debt or ahistorical trade imbalances. Unemployment is low, and so is inflation. The housing market has bounced back, but new home construction is still far below the pre-crisis high. Commercial real-estate borrowing is significantly below its levels during the real-estate bubbles of the mid-1980s and mid-2000s. Furthermore, there doesn’t seem to be much fear that the Fed will panic and suddenly raise rates or sell off assets in a hurried bid to combat inflation.

Indeed, investors seem so unalarmed they are practically napping. Trading volatility is at record lows. As the investor and Bloomberg writer Conor Sen pointed out on Twitter, the number of days in the last year where trading moved the stock market more than 1 percent is near its 60-year trough.

This week, Morgan Stanley predicted a small and imminent “correction,” due to the unwinding of the Federal Reserve’s balance sheet and the potential failure of the GOP tax-cut legislation. But it’s not clear that investors should fret about either of these things. Trump and his ex-Goldman economic advisers must understand that the economy is the best thing the president has going for him. It would be quite strange for a claque of former bankers to tap a new Fed chair who quickly raises rates and shrinks the Fed’s balance sheet, which would spook big banks and throttle economic growth.

As for taxes, the Republican Party might contain just enough deficit hawks to reject the current tax framework, which would add trillions to U.S. debt. But it’s almost inconceivable that a GOP-controlled government could screw up a small tax cut within 12 months of a midterm election. As Senator Lindsey Graham said of passing tax cuts on CBS’s Face the Nation on Sunday, “If we don’t, we’re dead.”

Perhaps the mere promise of future tax cuts is enough to string along an otherwise calm stock market. It’s a bit like a mother running an errand with her daughter in the car, who purchases her little girl’s cooperation with the promise of a future ice-cream cone. Inevitably, the allegedly short shopping excursion becomes an afternoon-long affair, testing the young girl’s patience. But as long as the girl believes the promise of imminent ice cream, she’ll at least try to behave a little.

The stock market might have slightly more patience than a 5-year-old girl, but it’s similarly riding the forward momentum of a global recovery while marginally motivated by the promise of a future benefit. Corporate tax reform is a nice little ice cream cone that mom has promised. As long as the promise is out there, the market can keep telling itself that tax cuts are on their way, no matter how much evidence Washington provides to the contrary.