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Larry Summers warns against drawing conclusions from the stock market

Sam Ro
Managing Editor

The stock market continues to set new all-time highs in what’s been a historic 8-year long bull market.

And much of the recent rally has been attributed to enthusiasm toward President Donald Trump’s various policy promises.

The question: has the market detached from fundamentals? Is this a “sugar high?”

“I don’t know that it’s the case,” former Treasury Secretary Larry Summers said. “Nobody could predict consistently what’s going to happen in markets.

In a wide-ranging interview in his offices at Harvard University, Professor Summers shared his thoughts on the matter.

“I do know this: the administration that saw the greatest increase in stock prices between election and the beginning of March was the Hoover Administration,” he said. “And the economy didn’t work out so well during that administration. I do know that the administrations that had the weakest performance over that same interval were the Obama Administration and the Clinton Administration, that were record setters in terms of job creation.”

In other words, stock prices don’t always do a great job of predicting what will happen in the economy.

“I think the attempt to generalize from what happens to stock prices is rather a mistake,” he said.

The Trump administration has repeatedly taken credit for sending stock prices to new record highs. However, the risk is that traders and investors may have gotten ahead of themselves.

“I think there is perhaps, still a sense in markets that the Trump Administration is going to be able to accomplish more, more quickly in terms of tax reduction, and in terms of actual changes on the ground in regulation, and in terms of promoting infrastructure investments, than I think is likely,” he said.

Just last week, Treasury Secretary Steven Mnuchin said he aimed to have a tax reform planned passed in July before the fall recess. Many see this as unrealistically optimistic.

“I think there’s substantial room for disillusion and disappointment to set in,” Summers said.

Traders work on the trading floor at the CME Group on February 11, 2011. (Photo by Scott Olson/Getty Images)

Summers’ wariness toward the stock market reflects comments he made in a Washington Post op-ed in January.

“[T]he fundamental basis for a big market rally is very unclear,” he wrote. “If ‘pro-business policies’ were, key over time it would not be the case that Democratic administrations have consistently seen stronger markets than Republican ones over the last 70 years.”

More from our interview with Larry Summers:

Full Interview: