The World Bank Doing Business Report: Changes in Rank May Not Mean What They May Appear to Mean

A.  The Issue

The World Bank has been publishing its Doing Business report annually, from the first released in September 2003 (and titled Doing Business in 2004) until the one released in October 2019 (and titled Doing Business 2020).  It has always been a controversial report, criticized for a number of different reasons.  But it has also been one that gained a good deal of attention – from the news media, from investors, and from at least certain segments of the public.  And because it received a good deal of attention (indeed more than any other World Bank report), governments paid attention to what it said, especially about them.

It is not my intention here to review those criticisms.  They are numerous.  Rather, in this post I will present a different approach to how the results could have been presented, which would have been more informative and which might have quieted some (but not all) of the criticisms.

One feature of the report, which was also the most widely discussed aspect of the report, was its ranking of countries in terms of their (assessed) environment for doing business. Because the Doing Business reports were widely cited, countries paid attention to those rankings and by various methods sought to improve their rankings.  These were often positive and productive, with countries seeking to simplify business regulation so that businesses could operate more effectively.  While some criticized this as simplistic, it is difficult to see a rationale, for example, justifying that in Venezuela (in 2020), to start a business would require completing 20 different procedures normally requiring (given the times for review and other requirements) an estimated 230 days.  In contrast, in New Zealand, starting a business involves only one procedure and can be completed in half a day.  Of course, few new businesses in Venezuela actually take 230 days to get started.  Either they are simply ignored (with bribes then paid to the police to leave them alone despite their violation of the regulations), or bribes are paid to obtain the licenses without going through the complex processes.

Given the prominence of the report, some countries undertook to improve their rankings through less positive means.  Sometimes the system could be gamed in various ways (e.g. to enact some “reform”, but then to limit its application narrowly so as to fit the letter, but not the spirit, of what was being assessed).  Or sometimes pressure could be applied on those submitting the data to slant it in a favorable direction.

And sometimes a country would try to apply political pressure on World Bank management in order to secure more favorable treatment.  A recently released independent investigation (commissioned by the World Bank Board, and undertaken by the law firm WilmerHale), found that there was such pressure (or at least perceived such pressure) brought by China on Bank management to ensure its ranking in the 2018 report would not fall.  At the instigation of the president’s offiice, and then overseen by the then #2 at the World Bank (Kristalina Georgieva – now the head of the IMF), Bank staff were directed to re-examine the ratings that had been assigned to China, and indeed re-examine the methodology more broadly, to see whether with some set of changes China’s ranking would not fall.  According to the WilmerHale report, several different approaches were considered and tried until one was found which would lead to the desired outcome.  In the almost final draft of the report, just before its planned publication, China’s ranking would have fallen from #78 in 2017 to #85 in 2018 – a fall of 7 places.  But with the last minute changes overseen by Georgieva, China’s ranking in 2018 became #78 – the same as in 2017.  And that was what was then published.

B.  An Alternative Approach

This focus on rankings is misguided, although not surprising given how the results are presented.  A country may well have enacted significant measures improving its business environment, but if countries a bit below it in the previous year’s rankings did even more, then the country could see a fall in its ranking despite the reforms it had undertaken.  And that fall in ranking would then often be interpreted in the news media (as well as by others) as if the business environment had deteriorated.  In this example, it had not.  Rather, it just did not improve as much as others.  But this nuance could easily be missed, and often was.

A different presentation in the Doing Business reports could have addressed this, and might have made the report a bit less controversial.  Rankings, by their nature, are a zero-sum game, where a rise in the ranking of one country means a fall in the ranking of another.  While this is needed in a sports league, where a tiny difference in the seasonal won/loss record can determine the ranking and hence who goes to the playoffs, it is not the same for the business environment.  Investors want to know what is good and what is not so good in an absolute sense, and small differences in rankings are of no great consequence.  And while some might argue that countries are competing in a global market for investor interest, there are far more important issues for any investor than some small difference in rankings.  For example, China and Malta were ranked similarly for several years in the mid-2010s, but whether one was a bit above or a bit below the other would be basically irrelevant to an investor.

An alternative presentation of the findings, based on comparison to an absolute rather than relative scale, would have been more meaningful as well as less controversial.  Specifically, countries could have been compared not against each other in every given year to see if their rankings had moved up or down, but rather to what the set of scores were (and consequent rankings were) in some base year.  That is, one would see whether their business environment had gotten better or worse in terms of the base year set of scores and consequent rankings (what one could call that base year’s “ladder” of scores).  The Doing Business project had that data, reported the underlying scores, and used those scores to produce its rankings.  But there was no systematic presentation of how the business environments may have changed over time, with this then compared to what the rankings were in some base period.

There were, I should note, figures provided in the Doing Business reports on the one-year changes in scores for each individual country, but few paid much attention to them.  They were for one-year changes only, and did not show the more meaningful cumulative changes over a number of years.  Nor did they then show how such changes would affect the country’s position on an understandable scale, such as what the ratings were across countries in a base year.

In this new approach, the comparison would be to an absolute scale (the scores and consequent rankings in the base year), not a relative ranking in each future period.  The issue is analogous to different types of poverty measures.  Sometimes poverty in a country is measured as the bottom 10% of the population (ranked by income).  This is a useful measure for certain things (such as how to target various social programs), but will of course always show 10% of the population as being “poor” regardless of how effective the social programs may have been.  In contrast, one could have an absolute measure of poverty (for many years the World Bank used the measure of $1 per day of income per person), and one could then track how many people were moving out of poverty (or not) by this measure.  Similarly, with the relative ranking of the 190 countries covered in the Doing Business reports, one will always find a mean ranking of 95, regardless of what countries may have done to improve their business environment.  It is, obviously, simply a relative measure, and not terribly useful in conveying what has been happening to the business environment in any given country.  Yet everyone focuses on it.

Any comparisons over time of these scores must also be over periods where the methodological approach used (precisely what is measured, and what weights are assigned to those measures) has not changed.  Otherwise one is comparing apples to oranges, where changes in the scores may reflect the methodological changes and not necessarily changes in the business environment of the countries.  Such changes in the methodological specifics have been criticized by some, as such changes in methodology will, in itself, lead to changes in rankings.  But one should expect periodic changes in the methodological approach used, as experience is gained and more is learned.

C.  The Results

The 2016 to 2020 period was one where the methodological specifics used in the Doing Business reports did not change, and hence one can make a meaningful comparison of scores over this period.  The data needed are what they specifically call the “Doing Business Scores”, which are the absolute values for the indices used to measure the business environment.  They range from 100 (for the best possible) to 0 (for the worst).  These scores have (at least until now) been made publicly available in the online Doing Business database.  I used these to illustrate what could be done to present the Doing Business results based on an absolute, rather than relative, scale.

The results are presented in a table at the end of this post, and readers might want to take a brief look at that table now to see its structure.  The base year is 2016, and the calculations are based on the changes in the country’s Doing Business Scores over the period from 2016 to 2020.  No country scores 100, and the top-ranked country (New Zealand) had an overall score of 87.1 in 2016 and slightly less at 86.8 in 2020.  I re-normalized the scores to set the top score (New Zealand’s 87.1 in 2016) to 100, with the rest then scaled in proportion to that.

The scores are thus shown as a proportion to what the best overall score was in 2016.  And this was done not just for the 2016 scores but also for the 2020 scores.  Importantly, the 2020 scores are not taken as a proportion of the best score for any country in 2020, but rather as a proportion of what the best score was in 2016.  Those scores are shown in the last two columns of the table, first for 2016 (as a proportion of what the best score was in 2016 – New Zealand at 87.1), and then for 2020 (again as a proportion of what the best score was in 2016 – New Zealand’s 87.1).  Note that on this scaling, New Zealand in 2016 would be 100.00, while in 2020 its rating would fall very slightly to 99.66 (as the Doing Business Score for New Zealand fell slightly from 87.1 in 2016 to 86.8 in 2020, and 86.8 is 99.66% of the 2016 score of 87.1).

The first two columns in the table show the rankings of countries, as the Doing Business reports have them now, for 2016 and then for 2020.  The sequence in the table is according to the ranking in 2016.  The third (middle) column then shows where a country would have ranked in 2016, had they had then the business environment that they had in 2020.  These are shown as fractional “rankings”, where, for example, if a country’s score in 2020 was halfway between the scores of countries ranked #10 and #11 in 2016, then that country would have a “rank” of 10.5.  That is, that country would have ranked between those ranked #10 and #11 in 2016, had they had a business environment in 2016 that they in fact had in 2020.

This now provides an absolute measure of country performance over time.  It is a comparison to where they would have ranked in 2016 had they had then what their policies later were.  This will then provide a more accurate account of what has been happening in the business environment in the country.  Take the case of Germany, for example.  It ranked #16 in 2016 and then lower at #22 in 2020.  Many would interpret this as a business environment that had deteriorated over the period.  But that is in fact not the case.  The absolute score was 91.27 in 2016 and a slightly improved 91.50 in 2020.  The business environment became slightly better (as assessed) between those two years, and it would have moved up a bit to a “rank” of 15.3 if it had had in 2016 the business environment it had in 2020.  But because a number of countries below Germany in 2016 saw a larger improvement in their business environment by 2020 than that of Germany, the relative ranking of Germany fell to #22.

Some of the differences could be large.  El Salvador, for example, ranked #80 in 2016 and fell to #91 in the traditional (relative) ranking for 2020.  But its business environment in fact improved significantly over the period, where the business environment it had in 2020 would have placed it at a ranking of 70.0 in 2016.  That is, it would have seen an improvement by 10 positions between the two periods rather than a deterioration of 11.  But other countries moved around as well, changing the relative ranking even though in absolute terms the business environment in El Salvador became significantly better.

D.  The Politics

One can understand how politicians in some country could grow frustrated if, after a period where they pushed through substantial (and possibly politically costly) reforms that aimed to improve their business environment, they then found that their Doing Business ranking nonetheless declined.  One might try to explain that other countries were also changing, and that despite their improvement other countries improved even more and hence pushed them down in rank.  This can follow when the focus is on relative rankings.  But this is not likely to be very convincing, as what the politicians see reported in the news media is the relative rankings.

A calculation of how the ratings would have changed in absolute terms would not suffer from this problem.  Countries would be credited for what they accomplished, not based on how what they did compares to what other countries might have done.  If all countries improved, then one would see that reflected when an absolute scale is used.  But when the focus is on relative rankings, any move up in rank must be matched by someone else moving down.  It is a zero-sum game.

Such a change in approach might have made the Doing Business reports politically more palatable.  It might also have reduced the pressure from countries such as China.  Throughout the period of 2016 to 2020, China was taking actions which, in terms of the Doing Business measures, were leading to consistently higher absolute scores each year, including for 2018.  With an absolute scale, such as that proposed here, one would have seen those year-by-year improvements in China’s position relative to where it would have been in a base year ranking (2016 for example).  The improvements were relatively modest in 2017 and 2018, and then much more substantial in 2019 and 2020.  But despite that (modest) improvement in 2018, China’s relative ranking in that year would have fallen 7 places to #84 from the #78 rank in the published 2017 report.  China found this disconcerting, and the WilmerHale report describes how Bank staff were then pressured to come up with a way to keep China’s (relative) ranking no worse than the #78 position it had in 2017.  And they then did.

At this point, however, a move to a presentation in terms of an absolute scale is too late for the Doing Business project as it has operated up to now.  Following the release of the WilmerHale report, the World Bank announced on September 16 that it would no longer produce the Doing Business report at all.  Whatever it might do next, if anything, will likely be very different.


2016  Rank 2020 Rank Rank with 2020 policy but 2016 ladder 2016 fraction of 2016 best 2020 fraction of 2016 best
New Zealand 1 1 1.1 100.00 99.66
Singapore 2 2 1.4 97.47 98.97
Denmark 3 3 1.8 97.01 97.93
Hong Kong, China 4 4 1.8 96.79 97.93
United States 5 5 4.4 95.98 96.44
United Kingdom 6 8 5.3 95.64 95.87
Korea, Rep. 7 6 4.4 95.41 96.44
Norway 8 9 7.4 93.92 94.83
Sweden 9 10 7.8 93.69 94.14
Taiwan, China 10 15 10.5 93.34 92.88
Estonia 11 18 10.9 92.42 92.54
Australia 12 14 10.1 92.31 93.23
Finland 13 20 12.7 91.96 92.08
Canada 14 23 15.7 91.62 91.39
Ireland 15 24 15.7 91.62 91.39
Germany 16 22 15.3 91.27 91.50
Latvia 17 19 12.3 90.82 92.19
Iceland 18 26 19.0 90.70 90.70
Lithuania 19 11 9.0 90.70 93.69
Austria 20 27 20.5 90.47 90.36
Malaysia 21 12 9.3 90.24 93.57
Georgia 22 7 4.9 89.90 96.10
North Macedonia 23 17 10.8 89.44 92.65
Japan 24 29 22.8 88.98 89.55
Poland 25 40 27.0 88.29 87.72
Portugal 26 37 25.8 87.72 87.83
Switzerland 27 36 25.6 87.72 87.94
United Arab Emirates 28 16 10.5 87.60 92.88
Czech Republic 29 41 28.0 87.37 87.60
France 30 32 25.2 87.37 88.17
Mauritius 31 13 9.3 87.26 93.57
Spain 32 30 23.0 87.14 89.44
Netherlands 33 42 30.0 86.68 87.37
Slovak Republic 34 45 32.7 85.88 86.80
Slovenia 35 38 25.8 85.76 87.83
Russian Federation 36 28 22.2 85.07 89.78
Israel 37 34 25.4 83.81 88.06
Romania 38 55 36.7 83.47 84.16
Bulgaria 39 61 41.0 83.24 82.66
Belgium 40 46 33.7 83.12 86.11
Cyprus 41 52 36.6 82.66 84.27
Thailand 42 21 13.0 82.55 91.96
Italy 43 58 37.3 82.32 83.70
Mexico 44 60 40.0 82.20 83.12
Croatia 45 51 36.5 81.97 84.50
Moldova 46 48 35.5 81.97 85.42
Chile 47 59 38.5 81.75 83.35
Hungary 48 53 36.6 81.63 84.27
Kazakhstan 49 25 15.7 81.40 91.39
Montenegro 50 50 36.3 81.06 84.73
Serbia 51 44 32.5 80.37 86.91
Luxembourg 52 72 51.5 79.45 79.91
Armenia 53 47 35.3 79.33 85.53
Turkey 54 33 25.2 79.33 88.17
Colombia 55 65 50.8 79.10 80.48
Belarus 56 49 35.7 78.87 85.30
Puerto Rico 57 66 50.8 78.87 80.48
Costa Rica 58 74 52.0 77.73 79.45
Morocco 59 54 36.6 77.38 84.27
Peru 60 76 57.0 77.15 78.87
Rwanda 61 39 25.8 77.04 87.83
Greece 62 79 57.3 76.81 78.53
Bahrain 63 43 31.0 76.46 87.26
Qatar 64 77 57.0 76.35 78.87
Oman 65 68 51.0 76.12 80.37
Jamaica 66 71 51.4 76.00 80.02
South Africa 67 84 61.5 76.00 76.92
Botswana 68 87 67.0 75.20 76.00
Azerbaijan 69 35 25.4 75.09 88.06
Mongolia 70 80 57.9 74.97 77.84
Bhutan 71 89 67.3 74.51 75.77
Panama 72 86 63.0 74.28 76.46
Tunisia 73 78 57.0 74.17 78.87
Ukraine 74 64 50.7 73.71 80.60
Bosnia and Herzegovina 75 90 69.0 73.59 75.09
St. Lucia 76 93 75.7 72.90 73.13
Kosovo 77 56 36.8 72.33 84.04
Fiji 78 101 86.0 72.10 70.61
Vietnam 79 70 51.3 71.87 80.14
El Salvador 80 91 70.0 71.64 74.97
China 81 31 24.3 71.53 88.75
Malta 82 88 67.1 71.53 75.89
Indonesia 83 73 51.5 71.30 79.91
Guatemala 84 96 80.0 70.84 71.87
Uzbekistan 85 69 51.1 70.84 80.25
Dominica 86 111 92.0 70.61 69.46
San Marino 87 92 74.0 70.49 73.71
Trinidad and Tobago 88 105 90.0 70.49 70.38
Kyrgyz Republic 89 81 57.9 70.38 77.84
Tonga 90 103 88.0 70.38 70.49
Kuwait 91 83 59.0 69.69 77.38
Zambia 92 85 62.0 69.46 76.81
Samoa 93 98 83.0 69.12 71.30
Uruguay 94 102 86.0 69.12 70.61
Namibia 95 104 88.0 68.89 70.49
Nepal 96 94 76.7 68.54 72.56
Vanuatu 97 107 90.3 68.08 70.15
Antigua and Barbuda 98 113 92.7 67.97 69.23
Saudi Arabia 99 62 44.0 67.97 82.20
Sri Lanka 100 99 83.8 67.97 70.95
Seychelles 101 100 85.0 67.74 70.84
Philippines 102 95 79.0 66.82 72.10
Albania 103 82 58.0 66.70 77.73
Paraguay 104 124 100.5 66.70 67.85
Kenya 105 57 36.8 66.59 84.04
Dominican Republic 106 115 95.0 66.48 68.89
Barbados 107 128 106.0 66.25 66.48
Brunei Darussalam 108 67 50.8 66.02 80.48
Bahamas, The 109 119 95.3 65.56 68.77
Ecuador 110 129 107.0 65.56 66.25
St. Vincent and the Grenadines 111 130 111.0 65.56 65.56
Ghana 112 116 95.0 65.44 68.89
Eswatini 113 121 96.5 65.33 68.31
Argentina 114 126 101.0 65.10 67.74
Jordan 115 75 54.5 65.10 79.22
Uganda 116 117 95.0 64.98 68.89
Honduras 117 133 116.6 64.41 64.64
Papua New Guinea 118 120 95.7 64.29 68.66
Brazil 119 125 100.5 63.83 67.85
St. Kitts and Nevis 120 139 126.5 63.83 62.69
Belize 121 134 120.5 63.61 63.72
Iran, Islamic Rep. 122 127 101.6 63.61 67.16
Lesotho 123 122 96.8 63.38 68.20
Egypt, Arab Rep. 124 114 94.5 62.80 69.00
Lebanon 125 143 127.7 62.80 62.34
Solomon Islands 126 136 122.5 62.80 63.49
India 127 63 48.5 62.57 81.52
West Bank and Gaza 128 118 95.0 62.23 68.89
Nicaragua 129 142 127.3 62.11 62.46
Grenada 130 146 131.0 61.54 61.31
Cabo Verde 131 137 123.4 61.31 63.15
Palau 132 145 129.8 60.96 61.65
Cambodia 133 144 129.6 60.73 61.77
Mozambique 134 138 123.4 60.62 63.15
Maldives 135 147 131.3 60.16 61.19
Tajikistan 136 106 90.0 59.47 70.38
Guyana 137 135 120.5 58.55 63.72
Burkina Faso 138 151 136.5 58.21 59.01
Marshall Islands 139 153 137.3 58.09 58.44
Pakistan 140 108 90.5 57.86 70.03
Côte d’Ivoire 141 110 91.0 57.75 69.69
Mali 142 148 133.0 57.75 60.73
Bolivia 143 150 136.1 57.18 59.36
Malawi 144 109 90.7 57.06 69.92
Tanzania 145 140 127.0 57.06 62.57
Senegal 146 123 97.0 56.95 68.08
Benin 147 149 135.0 55.91 60.16
Nigeria 148 131 113.0 55.57 65.33
Lao PDR 149 154 137.7 55.34 58.32
Micronesia, Fed. Sts. 150 158 150.0 55.22 55.22
Zimbabwe 151 141 127.0 54.88 62.57
Sierra Leone 152 162 151.3 53.85 54.54
Togo 153 97 82.0 53.85 71.53
Suriname 154 163 151.3 53.27 54.54
Niger 155 132 113.5 53.16 65.21
Comoros 156 160 150.7 53.04 54.99
Gambia, The 157 155 142.0 53.04 57.75
Burundi 158 165 153.2 52.35 53.73
Sudan 159 171 160.5 52.24 51.44
Kiribati 160 164 153.0 52.12 53.85
Djibouti 161 112 92.0 50.86 69.46
Guinea 162 156 146.2 50.86 56.72
Algeria 163 157 147.3 50.75 55.80
Gabon 164 168 160.4 50.52 51.66
Ethiopia 165 159 150.3 50.29 55.11
Mauritania 166 152 136.9 50.29 58.67
São Tomé and Principe 167 169 160.4 50.29 51.66
Syrian Arab Republic 168 176 170.5 49.37 48.22
Iraq 169 172 160.6 49.25 51.32
Myanmar 170 166 153.2 48.34 53.73
Cameroon 171 167 157.2 48.11 52.93
Madagascar 172 161 151.1 48.11 54.76
Bangladesh 173 170 160.4 46.96 51.66
Guinea-Bissau 174 174 167.8 46.38 49.60
Equatorial Guinea 175 178 172.8 45.92 47.19
Liberia 176 175 167.8 45.92 49.60
Afghanistan 177 173 163.5 45.12 50.63
Timor-Leste 178 181 176.9 45.12 45.24
Congo, Rep. 179 180 176.7 44.66 45.35
Yemen, Rep. 180 187 188.0 44.09 36.51
Haiti 181 179 173.4 43.28 46.73
Angola 182 177 172.6 43.17 47.42
Chad 183 182 182.3 40.53 42.37
Congo, Dem. Rep. 184 183 182.6 39.49 41.56
Venezuela, RB 185 188 188.2 39.15 34.67
South Sudan 186 185 183.8 37.66 39.72
Libya 187 186 186.5 37.43 37.54
Central African Republic 188 184 182.9 36.74 40.87
Eritrea 189 189 188.9 24.00 24.80
Somalia 190 190 190.0 23.19 22.96


The Performance of the Stock Market During Trump’s Term in Office: Not So Special

A.  Introduction

Stock market performance is often taken to be a good measure of how the economy as a whole is performing.  But it is not.  For most Americans it is simply irrelevant, as the overwhelming share of investments in the stock markets are held by only a small segment of the population (the wealthy).  And its track record as a broader indicator of how the economy is performing is imperfect at best.

Still, many do focus on stock market returns, and Trump brags that the performance of the market during his term in office has been spectacular.

That is not the case.  This post will look at how the stock market has performed during Trump’s term in office thus far, and compare it to what that performance was under presidents going back to Reagan up to the same point in their terms.

First, however, we will briefly discuss to what extent one should expect stock market prices to reflect actions a president might be taking.  And the answer is some, but there is much more going on.

B.  Presidential Policies and the Stock Market

Owning shares of a firm entitles the owner to a share of the profits generated by that firm, both now and into the future.  And while there are many complications, a simple metric commonly used to assess the price of a share in a firm, is the price/earnings ratio.  If earnings (profits) go up, now and into the future, then for a given price/earnings ratio the price of the stock would go up in proportion.

Economic policies affect profits.  And in a thriving economy, profits will also be rising.  The policies of a presidential administration will affect this, and although the link is far from a tight one (with important lags as well), policies that are good for the economy as a whole will generally also lead to a rising stock market.

But there is also a more specific link to policy.  What accrues to the shareholders are not overall profits, but profits after taxes.  And this changed significantly as a result of the new tax law pushed through Congress by Trump and the Republicans in December 2017.  It resulted in the effective corporate profits (income) tax being cut by more than half:

This chart is an update of one prepared for an earlier post on this blog (where one can see a further discussion of what lies behind it).  It shows corporate profit taxes at the federal level as a share of corporate profits (calculated from figures in the national income accounts issued by the BEA).  While Trump and the Republicans in Congress asserted the 2017 tax bill would not lead to lower corporate profit taxes being paid (as loopholes would be closed, they asserted), in fact they did.  And dramatically so, with the effective corporate tax rate being slashed by more than half –  from around 15 to 16% prior to 2017, to just 7% or so since the beginning of 2018 (and to just 6.3% most recently).

This cut therefore led to a significant increase in after-tax profits for any given level of before-tax profits, which has accrued to the shareholders.  Note that this would not be due to the corporations becoming more productive or efficient, but rather simply from taxing profits less and shifting the tax burden then on to others (i.e. a redistributive effect).  And based on a reduction in the taxes from 16% of corporate profits to 7%, after-tax profits would have gone from 84% of profits to 93%, an increase of about 11%.  For any given price/earnings ratio, one would then expect stock prices, for this reason alone, to have gone up by about 11%.

[Side note:  Technically one should include in this calculation also the impact of taxes on profits by other government entities – primarily those of state and local governments.  These have been flat at around 3 1/2% of profits, on average.  With these taxes included, after-tax profits rose from 80 1/2% of before-tax profits to 89 1/2%, an increase that is still 11% within round-off.]

One should therefore expect that stock prices following this tax cut (or in anticipation of it) would have been bumped up by an additional 11% above what they otherwise would have been.  Other things equal, the performance of the stock market under Trump should have looked especially good as a result of the shift in taxes away from corporations onto others.  But what has in fact happened?

C.  Trump vs. Obama

The chart at the top of this post compares the performance of the stock market during Trump’s term in office thus far (through December 31, 2019) to that under Obama to the same point in his first term in office.  The difference is clear.  Other than during Obama’s first few months in office, when he inherited from George W. Bush an economy in freefall, stock market performance under Obama was always better than it has been under Trump.  Even after slashing corporate profit taxes by more than half, the stock market under Trump did not do exceptionally well.

The S&P500 Index is being used as the measure of the US stock market.  Most professionals use this index as the best indicator of overall stock market performance, as it is comprehensive and broad (covering the 500 largest US companies as measured by stock market value, with the companies weighted in the index based on their market valuations).  The data were downloaded from Yahoo Finance, where it is conveniently available (with daily values for the index going back to 1927), but can be obtained from a number of sources.  The chart shows end-of-month figures, starting from December 31 of the month before inauguration, and going through to December 31 of their third year in office.  The index is scaled to 100.0 on exactly January 20 (with this presented as “month” 0.65).

So if one wants to claim “bragging rights” for which president saw a better stock market performance, Obama wins over Trump, at least so far in their respective terms.

D.  Trump vs. All Presidents Since Reagan

A comparison to just one president is limited.  How does the performance under Trump compare to that under other US presidents up to the same points in their terms in office?  Trump is roughly in the middle:

This chart tracks the performance under each president since Reagan up through the third year of their first terms in office.  I have adjusted here for inflation (using the CPI), as inflation was substantially higher during the Reagan and Bush Sr. terms in office than it has been since.  (I left the chart at the top of this post of just Obama vs. Trump in nominal terms as inflation in recent years has been steady and low.  But for those interested in the impact of this, one can see the Obama and Trump numbers in real terms in the current chart.)  I have included in this chart only the first terms of each president (with one exception) as the chart is already cluttered and was even more so when I had all the presidential terms.

The exception is that I included for perspective the stock market performance during Clinton’s second term in office.  The stock market rose over that period by close to 80% in real terms, which was substantially higher than under any other president since at least before Reagan in either their first or second terms.  The performance in Obama’s first term (of 146% in real terms) was the second-highest.  There was then a set of cases which, at the three-year mark, showed surprising uniformity in performance, with increases of between 32% and 34% in the second Reagan term, the first Clinton term, the second Obama term, and Trump’s term so far.  Bush Sr. was not far behind this set with an increase of 28%.

The worst performances were under Bush Jr. ( a fall of 22% to the third-year point in his first term), and Reagan (an increase of just 8% to that point in his first term).

So the performance of the market under Trump is in the middle – not the worst, but well below the best.

E.  Single Year Increases in the S&P500 from 1946 to 2019

Finally, was the increase under Trump in his best single year so far (2019) a record?  No, it was not.  Looking at the single year performances (in real terms) since 1946, the top 15 were:

The increase in 2019, of 25.9%, was good, but only the sixth-highest of the 74 years between 1946 and 2019 (inclusive).  The stock market rose by more in 2013 during Obama’s term in office (by 27.7%), and in 1997 (28.8%) and 1995 (30.8%) which were both Clinton years.  And the highest increases were in 1958 (35.7%) and 1954 (45.6%) when Eisenhower was president.

The market also rose substantially in 2017, in Trump’s first year in office, by 16.9%.  But it then fell by 8.0% in 2018, in Trump’s second year in office.  Overall, the average rank (out of the 74 years from 1946 to 2019) of the individual year performances over the three years Trump has been in office so far, would place Trump in the middle third.  Not the worst, but also far from the best.  And comparing the three-year average while Trump has been president to rolling three-year averages since 1946, Trump’s average (of 11.6%) is well below the best.  The highest was an average return of 25.3% in 1995-97 during Clinton’s term in office.  And the three-year average return was also higher at 16.7% in 2012-14 during Obama’s term.

F.  Summary and Conclusion

Trump likes to brag that the performance of the stock market during his term in office has been exceptional.  But despite a slashing of corporate profit taxes (which, other things being equal would be expected to increase stock prices by 11%), the performance of the market during Trump’s term in office would put him in the middle.  Specifically:

a)  The market rose by more during the first three years of Obama’s term in office than it has under Trump;

b)  Compared to the first three years in office of all presidents since Reagan (whether first terms only, or first and second terms) would place Trump in the middle.  Indeed, the increase under Trump so far was almost exactly the same as the increases seen (at the three-year point) in Obama’s second term, in Reagan’s second term, and in Clinton’s first term.  And the return under Trump was well below that seen in Obama’s first term, and especially far below that in Clinton’s second term.

c)  The individual year performances during Trump’s three years have also not been exceptional.  While the performance in 2019 was good, it was below that of a number of other years since World War II, and below that of individual years during Obama’s and Clinton’s terms in office.

But as noted at the start of this post, stock market returns should not be over-emphasized.  An increase in the stock market does little for those who do not have the wealth to have substantial holdings in the stock market, and as a broader indicator of how the overall economy is performing, stock market returns are imperfect at best.

Still, one should be accurate in one’s claims.  And as on many things, Trump has not been.

The Fed is Not to Blame for the Falling Stock Market

Just a quick note on this Christmas Eve.  The US stock markets are falling.  The bull market that had started in March 2009, two months after Obama took office, and which then continued through to the end of Obama’s two terms, may be close to an end.  A bear market is commonly defined as one where the S&P500 index (a broad stock market index that most professionals use) has fallen by 20% or more from its previous peak.  As of the close of the markets this December 24, the S&P500 index is 19.8% below the peak it had reached on September 20.  The NASDAQ index is already in bear market territory, as it is 23.6% lower than its previous peak.  And the Dow Jones Industrial average is also close, at a fall of 18.8% from its previous peak.

Trump is blaming the Fed for this.  The Fed has indeed been raising interest rates, since 2015.  The Fed had kept interest rates at close to zero since the financial collapse in 2008 at the end of the Bush administration in order to spur a recovery.  And it had to keep interest rates low for an especially long time as fiscal policy turned from expansionary, in 2009/10, to contractionary, as the Republican Congress elected in 2010 forced through cuts in government spending even though employment had not yet then fully recovered.

Employment did eventually recover, so the Fed could start to bring interest rates back to more normal levels.  This began in late 2015 with an increase in the Fed’s target for the federal funds rate from the previous range of 0% to 0.25%, to a target range of 0.25% to 0.50%.  The federal funds rate is the rate at which banks borrow or lend federal funds (funds on deposit at the Fed) to each other, so that the banks can meet their deposit reserve requirements.  And the funds are borrowed and lent for literally just one night (even though the rates are quoted on an annualized basis).  The Fed manages this by buying and selling US Treasury bills on the open market (thus loosening or tightening liquidity), to keep the federal funds rate within the targeted range.

Since the 2015 increase, the Fed has steadily raised its target for the federal funds rate to the current range of 2.25% to 2.50%.  It raised the target range once in 2016, three times in 2017, and four times in 2018, always in increments of 0.25% points.  The market has never been surprised.  With unemployment having fallen to 5.0% in late 2015, and to just 3.7% now, this is exactly one would expect the Fed to do.

The path is shown in blue in the chart at the top of this post.  The path is for the top end of the target range for the rate, which is the figure most analysts focus on.  And the bottom end will always be 0.25% points below it.  The chart then shows in red the path for the S&P500 index.  For ease of comparison to the path for the federal funds rate, I have rescaled the S&P500 index to 1.0 for March 16, 2017 (the day the Fed raised the target federal funds rate to a ceiling of 1.0%), and then rescaled around that March 16, 2017, value to roughly follow the path of the federal funds rate.  (The underlying data were all drawn from FRED, the economic database maintained by the Federal Reserve Bank of St. Louis.  The data points are daily, for each day the markets were open, and the S&P 500 is as of the daily market close.)

Those paths were roughly similar up to September 2018, and only then did they diverge.  That is, the Fed has been raising interest rates for several years now, and the stock market was also steadily rising.  Increases in the federal funds rate by the Fed in those years did not cause the stock market to fall.  It is disingenuous to claim that it has now.

Why is the stock market now falling then?  While only fools claim to know with certainty what the stock market will do, or why it has moved as it has, Trump’s claim that it is all the Fed’s fault has no basis.  The Fed has been raising interest rates since 2015.  Rather, Trump should be looking at his own administration, capped over the last few days with the stunning incompetence of his Treasury Secretary, Steven Mnuchin.  With a perceived need to “do something” (probably at Trump’s instigation), Mnuchin made a big show of calling on Sunday the heads of the six largest US banks asking if they were fine (they were, at least until they got such calls, and might then have been left wondering whether the Treasury Secretary knew something that they didn’t), and then organizing a meeting of the “Plunge Protection Team” on Monday, Christmas Eve. This all created the sense of an administration in panic.

This comes on top of the reports over the weekend that Trump wants to fire the Chairman of the Fed, Jerome Powell.  Trump had appointed Powell just last year.  Nor would it be legal to fire him (and no president ever has), although some may dispute that.  Finally, and adding to the sense of chaos, a major part of the federal government is on shutdown starting from last Friday night, as Trump refused to approve a budget extension unless he could also get funding to build a border wall.  As of today, it does not appear this will end until some time after January 1.

But it is not just these recent events which may have affected the markets.  After all, the S&P500 index peaked on September 20.  Rather, one must look at the overall mismanagement of economic policy under Trump, perhaps most importantly with the massive tax cut to corporations and the wealthy of last December.  While a corporate tax cut will lead to higher after-tax corporate profits, all else being equal, all else will not be equal.  The cuts have also contributed to a large and growing fiscal deficit, to a size that is unprecedented (even as a share of GDP) during a time of full employment (other than during World War II).  A federal deficit which is already high when times are good will be massive when the next downturn comes.  This will then constrain our ability to address that downturn.

Plus there are other issues, such as the trade wars that Trump appears to take personal pride in, and the reversal of the regulatory reforms put in place after the 2008 economic and financial collapse in order not to repeat the mistakes that led to that crisis.

What will happen to the stock market now?  I really do not know.  Perhaps it will recover from these levels.  But with the mismanagement of economic policy seen in this administration, and a president who acts on whim and is unwilling to listen, it would not be a surprise to see a further fall.  Just don’t try to shift the blame to the Fed.