The S&P 500, the Dow, and the Nasdaq all hit record highs last week. Bitcoin, which is nothing but a bet on what other Bitcoin investors think the fake currency is worth, traded at over $100,000, more than double its value in February.
By almost any measure, the market is overvalued and due for a major correction if not a serious crash on Trump’s watch. The only question is whether today is more like the spring of 1928, with more upside still to come, or the fall of 1929, with the crash just over the next hill.
Price-to-earnings ratios of a broad market of publicly-traded companies (the Russell 2000) are now around 36 percent, higher than in October 1929. Corporate earnings are also at record highs. Those who think that corporate profits, and hence stock values, can climb even higher point to Trump’s agenda of deregulation and tax cuts. They may be right, in the relatively short run.
However, Trump is also determined to raise tariffs, which could raise the costs of inputs as well as consumer goods, and slow GDP growth. His tax cut program is sure to increase the budget deficit. That deficit in turn is likely to spook the
Federal Reserve.
Nothing would collapse the inflated stock market more surely than an interest rate hike. Trump’s on-and-off badmouthing of Fed Chair Jay Powell, whose term doesn’t expire until May 2026, only increases the possibility that the central bank will rain on Trump’s parade, not out of retribution but because Powell doesn’t trust Trump’s economic instincts.
Even without these missteps, the stock market can’t keep rising in value several times faster than the economy indefinitely. Warren Buffett, who knows something about investing, has
moved a cool $325 billion of his fortune out of stocks and into cash.
The entire history of financial capitalism is one of bubble and crash: euphoria on the upside, and then collapse when investors sense that the market is turning, and the herd all decides to sell at the same time.
Stocks, at least, are shares in real companies. The crypto fad worsens this boom-bust pattern, since these currencies are built on air. The total value of the crypto market is just under $4 trillion. Bitcoin prices crashed by some 75 percent in 2022 when the Fed tightened
money.
Stock ownership is highly concentrated. But as in 1929, a stock market collapse has reverberating effects on the rest of the economy. People lose their jobs.
The market runup may continue for some time, but it would be defying gravity if there were not a major break before the 2026 midterms. Trump has dictatorial fantasies, but even Trump is not capable of commanding stock prices to levitate.
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