ARI SHAPIRO, HOST:
Before the presidential election, two prominent economists predicted that a surprise Trump victory would drive the stock market sharply lower. They based this on research that seemed sound, and they tracked movements in the market. But the market has been on a big rally since Trump won, so what happened? NPR's Chris Arnold reports.
CHRIS ARNOLD, BYLINE: Right before the votes were cast, economist Eric Zitzewitz was making a pretty dire prediction about what would happen if Donald Trump won.
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ERIC ZITZEWITZ: This election is going to be a very big deal economically. The market really cares.
ARNOLD: Zitzewitz said in past years, he and his research partner predicted a 2 percent swing in the U.S. stock market, depending on which presidential candidate won. This time, though, it was a far bigger swing - 12 percent - trillions of dollars hanging in the balance. It seemed that Trump was such a wild card he was scaring investors.
ZITZEWITZ: The stock market doesn't want Trump to win.
ARNOLD: Of course, that turned out to be completely backwards. The markets hit new all-time records after Trump won. So some people are saying that these respected economists kind of messed up here, and one of those people is my editor, NPR's Uri Berliner.
URI BERLINER, BYLINE: Yeah, right. So the S&P 500 is up 3 percent since Trump's win, so they were totally wrong, like so many of us were about this election. I mean, they were not even close.
ARNOLD: Well, I think there were actually right. And to me, it just seems like the market changed its mind - that they were measuring something properly, but then something changed.
BERLINER: No, I think they were totally wrong.
ARNOLD: OK. So Uri and I have been having a mostly friendly argument about this since the election. So we decided to go back and talk to the economists about this and also about what is going on with the stock market.
ZITZEWITZ: My name is Eric's Zitzewitz, and I'm an economist at Dartmouth.
JUSTIN WOLFERS: My name is Justin Wolfers. I'm a professor of economics and public policy at the University of Michigan.
ZITZEWITZ: I don't want to sound defensive, but - correct me if I'm wrong, Justin - but both of us agree with Chris that the market changed its mind.
WOLFERS: Yeah. So I think Eric and I have had exactly the same debate between ourselves. This is where I say we were right until we were wrong.
ARNOLD: Justin Wolfers says, look, what they were measuring was pretty simple. They were looking at moments where key events happened in the campaign. When, say, the FBI said it was looking at Clinton's emails, the odds of Clinton winning went down, and the stock market went down. They could do math and figure out how much this was affecting the stock market, and both economists stick by their numbers. And on election night, at first, the market kept behaving that way.
WOLFERS: As the count proceeded and it became increasingly likely that Trump was going to be president, we saw stock markets cratering. By about midnight on election night, the U.S. stock market was down about 5 percent, which actually hit the circuit breakage, so our predictions looked very good.
ARNOLD: But then Trump came out and spoke. He talked about infrastructure spending. He looked more presidential. Maybe that's why, but for some reason, more investors got more optimistic and started buying stocks, and the market went up. Now, maybe it's not surprising that the economists agree that they were measuring things properly, but here's the part that they admit Uri is right about. Uri asks what is the use of research like this if the accuracy of the results is so short-lived?
BERLINER: They were right for maybe the first few hours after it was clear that Trump won. But I think they failed to understand or predict what would happen when people started to absorb the Trump victory.
WOLFERS: It's dead right, and I plead guilty. And let me say the other people who should plead guilty is every trader in financial markets.
ARNOLD: But why did investors in the market so completely change their minds? There are a bunch of theories out there. One is that there's something about human psychology that makes us look at things differently once they're a reality and not just some imagined future. So maybe that's why investors started focusing more on the stimulus of tax cuts and infrastructure spending instead of fear and uncertainty. Also, maybe there's a momentum factor here.
ZITZEWITZ: That's a possible story where, you know, the rally feeds back into political capital for Trump, which makes it possible for him to do a mix of things that's more helpful for the economy.
ARNOLD: And because of that, the stock market keeps rising. And while it's embarrassing that their prediction only lasted a few hours, Zitzewitz says...
ZITZEWITZ: I really hope the market's current forecast about Trump, which is much more benign, turns out to be more correct than the pre-election one.
ARNOLD: But I guess as we just learned, everything might change tomorrow.
ZITZEWITZ: Yeah, exactly.
ARNOLD: Chris Arnold, NPR News.
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