Illinois State Treasurer Michael Frerichs evidently just couldn’t resist. On June 20, he published a news release touting a record $130 million in earnings for the state’s investment portfolio during May. That’s a great return for a single month, and Frerichs’ efforts to take credit settle a nagging question.
If Illinois loses a hundred million bucks or more during the next big downturn, everyone will know exactly whom to blame: Mike Frerichs, it’s on you, at least if we follow the logic of your publicity machine.
Of course, reality differs from spin. Frerichs’ news release omitted the fact that his record gain in May came during a phenomenal run for U.S. financial markets, which have become the envy of the world, based on absolutely nothing to do with Frerichs.
U.S. stocks and bonds weathered the pandemic much better than those of other wealthy nations. Since mid-2020, as U.S. performance rebounded from the initial shock of COVID-19, money has poured in from foreign investors who consider America’s prospects a lot better than those of their home countries.
A resilient economy, strong corporate earnings, moderating interest rates, soaring home values and a boom in artificial intelligence and the green economy have added up to the best first half in an election year since 1976. But unsustainable budget deficits and a strong dollar pose risks, as does the persistence of inflation, weaker-than-expected consumer confidence and sluggish growth in the economies of U.S. trading partners.
If there’s one lesson that Frerichs and every other investor should remember, it’s that markets always come back to earth eventually.
In Thursday’s debate between a doddering President Joe Biden and a ranting ex-President Donald Trump, the candidates voiced very different takes on the economy and markets. Trump took credit for ceding to Biden “a country where the stock market was higher than pre-COVID,” while Biden countered that the economy he inherited “was in free fall,” going on to suggest he corrected it.
U.S. presidents have the capacity to influence the economy and financial markets to some extent — less than the Federal Reserve, but more than Frerichs, anyway. Still, that influence is mostly felt on the margins, in response to an administration’s priorities on taxation, deficit spending and other broad policies that play out over time.
Even so, Trump has regularly tried to take credit even when the facts dictate blame. After being thrown out of office, he spent a couple of years predicting doom for the U.S. economy and markets. When that didn’t work out as he selfishly hoped, Trump tried taking credit for the strong performance under Biden. “This is the Trump stock market,” he proclaimed earlier this year, following up with the prediction from his out-of-order crystal ball that if Biden is reelected on Nov. 5, the stock market will “crash.”
Biden, who has seen plenty of big-mouth politicians come and go, long avoided touting financial market gains. In the early years of his presidency, he emphasized the contrast with Trump’s approach. “I don’t look at the stock market as a means by which to judge the economy like my predecessor did,” he said in 2021.
With a close election looming, Biden has changed his tune on the campaign trail, noting that the stock market “has hit record after record on my watch.” That’s true, but it also opens him up to responsibility for any record declines.
As it stands, the financial market’s balance between fear and greed strongly favors greed. In fact, the so-called “fear index” traded at Chicago’s Cboe Global Markets — which is based on volatility — has mostly remained at low levels of fear for years now. That could change, of course, and as the incumbent, Biden has more to lose if fear takes over. His fading reelection hopes may well depend on a continued benign environment. An October surprise could sink him.
Frerichs, too, has reason to hope for a continued upswing in the markets. In 2021, when the bull market revved up, he published a news release touting how he had produced $1 billion in investment earnings since taking office in 2015. “Making smart and sound investments may not be glamorous, but it is what we do every day,” he modestly explained.
At the same time, Frerichs also took credit for reforms that enabled him to make bets with state money that were indeed smarter, such as putting part of its ultraconservative portfolio into highly rated corporate bonds. That commonsense step wasn’t previously allowed, at least partly because politicians feared the public’s wrath if the markets went south, producing big losses.
We have no problem with the treasurer increasing investment risk prudently in search of better returns for Illinois taxpayers. But better to note these results without self-congratulations. Otherwise, Frerichs should be prepared to take the blame if and when the market sours. Just like whoever gets elected president on Nov. 5.
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