How to sound smart about the yo-yoing stock market

I reached out to CNN Money's Matt Egan for some answers. We exchanged a series of emails on Tuesday about What It All Means. Our conversation, lightly edited for flow, is below.

Cillizza: The Dow tanked on Monday. Largest loss -- in terms of points -- in history. So, um, why? (I took one macroeconomics class in college, so go easy on me.)

Also, the White House response was, essentially: Be cool. Everything is totally chill. Are they right? Are the fundamentals of the economy strong despite what happened Monday?

Egan: Don't sweat it. We'll keep it simple.

Yes, the Dow dropped a record 1,175 points Monday. But pay close attention to the percentage decline. It was 4.6%. That's pretty ugly (worst since 2011), but not as bad as the 7% losses experienced several times in 2008.

The big difference between now and 2008 is that the economy IS healthy right now. The fundamentals -- unemployment, GDP growth, corporate earnings -- do look strong.

If anything, the sudden concern on Wall Street is that the economy may be overheating. That means inflation, which stock investors hate. Inflation is no fun for the stock market because it forces the Federal Reserve to aggressively [raise] interest rates. Think of that like removing the punch bowl from the party.

Cillizza: Spiked punch?

OK. Good to remember too that the stock market is not the economy and vice versa. They are correlated but not the same thing.

What I wonder is if -- despite the underlying strengths of the economy -- a handful of bad days for the stock market starts to become a self-fulfilling prophecy. Like, the market drops 3,000 points in a week and everyone freaks the hell out despite knowing that this isn't 2008 all over again. Does that freak out wind up tanking the recovery?

Egan: You're right about the stock market not being the economy. The US unemployment rate is at a 17-year low of 4.1%. That hasn't changed overnight just because the Dow plunged.

But there's no doubt that if the market continued having scary days it would have an impact on the real economy. Americans still look at the Dow to get a pulse on the mood of financial markets. If they saw the Dow losing 1,000 points on the regular, it would dent consumer sentiment and perhaps spending. CEO and small business confidence would also take a hit, leading to less hiring.

Thankfully, we're not at that point yet. By a long shot. The Dow spiked an incredible 8,283 points between the election and the peak of two weeks ago. Roughly a quarter of that gain has been wiped out.

Cillizza: That's a very interesting point -- what people believe the Dow represents.

The average person -- I don't think -- really understands what the Dow actually is but they do put some stock-- ahem -- in it. Consumer confidence is at least partially based in the Dow, even though most people have no idea what it is measuring!

Now, for a little politics. Trump has spent the last year claiming credit for all the gains from the stock market. And insisting that without him in office, the stock market would have dropped 50%.

How much influence can any one person -- the President included -- have on the Dow? And how?

Egan: President Trump has gone out of his way to claim credit for the booming stock market. He's tweeted about the market dozens of times since getting elected. And unlike his predecessors, he's often commenting on the day-to-day moves -- not just the broad gains.

It's fair to say that a sizable chunk of the post-election rally was driven by enthusiasm over the Trump economic agenda. Specifically, investors were fired up about the plan to cut regulation, give businesses massive tax cuts and let them repatriate foreign profits.

But that's only part of the story. The other part is that Corporate America has been minting money -- even before the tax cuts. Those earnings power stock prices. Moreover, the economic backdrop has been strong. US growth picked up in 2017 and the global economy is finally firing on all cylinders.

And don't forget that Trump inherited a solid economy and a bull market in stocks that had already been alive for nearly eight years.

Cillizza: But, there's talk now that the tax cuts are actually behind all of this, right? That rising wages is pushing up inflation worries? You mentioned it briefly before. How much of that is hard facts and how much is guesswork given that tax cut implementation is in its earliest stages?

As for Trump, I have long believed he's a day-to-day President. As in, what he does today tells us very little about what he will do tomorrow. And, unlike most other politicians, he is totally unbothered by saying the sky is green on a Tuesday and that it's actually blue on Wednesday. So, he is totally unconcerned that by touting the market's gains for much of the first year of his presidency, he might be held to account if and when the Dow goes into an extended slump.

It's actually somewhat remarkable. He's like the Drew Barrymore character in "50 First Dates." (Adam Sandler's finest hour.) He wakes up every morning totally unaware of what he has said and done the day before. It must be a freeing way to look at the world.

Egan: The past few days have showed how hitching your presidency to the notoriously fickle stock market can make things a bit uncomfortable. Markets are moody and a rally can quickly turn into a selloff.

So here's the way to think about the tax cuts and the stock market. Wall Street got really excited about the idea of companies saving tons on what they owe Uncle Sam. The market didn't really question whether the economy, which already looked healthy, actually needed a big dose of medicine.

But some economists had been warning that stimulating a strong economy can have negative side effects. Like inflation that forces the Fed to raise rates so quickly that stocks slide. That fear has been at the heart of the recent turmoil.

Consider how the market reacted to the really good jobs news on Friday. Best wage growth since 2009. Yet stocks tumbled. Investors are worried about those pay raises into corporate profits. And forcing the Fed to act. It's an example of good news for Main Street being bad news for Wall Street.