So, I’ve been watching the DOW for quite a while now with growing puzzlement. In a fairly short time, I’ve seen milestone come and go. Over 20k…did that. 21k…did that. 22k…did that. Now we are closing in on 23k. That is…well, it’s unreal. And it’s happening at a time when, at least from my perspective, it should be in correction mode. I mean, Trump is one of the most chaotic presidents ever, at least IMHO. Congress seems in the same deadlock as ever. On the world scene, I’m not seeing a lot of stability either. We have the situation with North Korea, the situation with Iran (mostly Trump made), the ongoing situation with Russia, the continuing situation in China…there just seems so much uncertainty and unknowns. Yet the DOW is up (NASDAQ is down today, but even that is at over 6.6K). What gives?
(not sure whether this is a GQ type question or IMHO…put it here since I THINK this is political and will almost certainly be a debate, but mods, feel free to move it if appropriate)
Everyone realizes that Trump is useless in terms of either having a coherent agenda or in terms of advancing an agenda if he actually had one. And since very little had been accomplished previously due to an obstructionist Congress, the current state of affairs doesn’t rely in an way on the government taking an active role.
What I’d pay attention to is Trump’s appointment of the next fed chair. You’re probably not going to get someone nearly as qualified as Yellen and that could be disastrous. Remember what happened under Greenspan.
I think it’s what John Mace said. Year to date the Vanguard Total Stock Market Index tracking the US Market is up 13.86%, but the Vanguard Total International Stock Market Index tracking only non-US stocks is up 21.62%. Globally everyone is doing very well. The US is actually lagging quite a bit relative to the global market.
You’re assuming, wrongly, that the criticism of Greenspan is just relying on the correlation of his tenure at the Fed. It isn’t. Greenspan championed the policies that led to The Great Recession, as he himself has admitted and apologized for.
Should have? Partisan people are generally incapable of correcting for their biases in assessing the market, especially if politics is mainly what they think about and market secondarily. And in general attaching any narrative explanation to what the market is somewhat arbitrary, certainly in terms of saying some exact % of the reason is this v that.
The US stock market has gone up in part on the likelihood of lowering of the corporate tax rate. Stocks are the discounted value of after tax earnings. If the tax rate goes down, the value goes up. That’s pretty straightforward and denying it’s any of the reason for the rally since Trump seems to me political bias getting the better of people. What’s good for the stock market in the near term isn’t necessarily best for everyone in society in the long term or even the stock market in the long term. But the prospect of a corporate tax cut has been stock positive recently; I don’t see a reasonable basis to deny that.
There’s another significant general positive, which is a better appearing world economic situation in general. And there’s always stuff to worry about both in general and as it regards Trump particularly*. But apparently those worries are not shared by market participants on a $ weighted basis to the degree they are by many people here. Or the market would be lower.
*eg. NK would be nearing intercontinental nuclear capability no matter who was president. It wouldn’t be a 100% non-problem just because another president decided to quietly accept it, or somehow more skillfully work to prevent it. It’s not an easy problem. And Trump hasn’t actually started a war over it: another way to look at stock market price action is that people with real money at stake by and large don’t think that will actually happen.
What part of reality does the DJIA actually measure? If the WH is promising rampant deregulation and privatization of public assets, I would think that that would be perceived as beneficial to profitability, at least in the near term. To what extent is trading adjusted for long-term effects and “externalities”?
The stock market measures the present value of future corporate earnings, after (corporate) tax. It does not measure some overall ‘societal good index’. The two, corporate profit present value and ‘SGI’ are probably substantially positively correlated overall, but not entirely and definitely aren’t the same thing.
So by definition it’s not ‘corrected’ for costs publicly traded corps’ activities impose on society their owners (the shareholders) don’t pay for. And as far ‘the long term’, despite it being fashionable to say ‘the stock market focuses too much on the short term’ there’s no way to rigorously demonstrate how it deals with short v. long term, or define ‘too much’.
But again if in a vacuum you lowered the corporate tax rate from 35% to 20%, stocks should rise 23%, (1-.2)/(1-.35). In the real world corporate deductions and credits will be eliminated as part of that rate reduction (ie a lot of companies pay effectively less than 35% now, it probably won’t be as easy to get below 20% under the new rules). And lots of other stuff plus and minus will be going on. But a big corporate rate reduction is a big plus for stocks. Trying to argue the Trump rally is a complete coincidence, with that corp tax cut promised, is kind of a stretch. As I believe will be quickly demonstrated if Congress can’t get it done.
As I understand it, part of it is upward pressure from low long-term interest rates, which themselves are the result of loose monetary policy and a global savings glut. So there’s a lot of money chasing returns. It’s not just stocks, it’s everything.
As to why things aren’t tanking with Trump in charge… it’s anyone’s guess, really. Here are my 2 cents, for what it’s worth:
[li]Stock valuations tend to follow factors that are fairly short-term and easily quantified. Trump is offering to slash taxes and regulations. Wall Street loves that. It may or may not happen, but taxes sure as shit aren’t going up.[/li][li]Nothing big has moved in the short-term risk picture. Some risky situations have gotten moderately more probable and consequential, and this feels scary, but the consequences still aren’t on the short-term horizon.[/li][li]There is a huge global savings glut due to an aging population in the largest economies. Sure, there is risk, but where’s a safe place to get any decent return nowadays?[/li][li]Concerns over Trump’s stability seem to be mitigated by the fact of his incompetence and ineffectuality.[/li][li]Investors, like people in general, tend to be vigilant about small risks, but totally complacent as to catastrophic risk. “Black Swan” events are seen as too horrible to be likely, and too big to prepare for anyway.[/li][/ul]
To take an example about the “black swan” comment… anything that tanks the Chinese economy, or US-Chinese trade relations, is going to be huge. Intuitively you would think investors would be frightened about the uptick in Korean conflict risk. But risk is just probability times consequences. The consequences were already enormous 3 years ago, so although the risk has increased, it hasn’t increased by much. I think this same calculus applies to a lot of the areas of concern you have mentioned.
This may be tangential, but how much may be related to index investing? I’ve been wondering about this recently in connection with my own investments; I follow the advice to buy & hold broad based index funds, and I’m not planning to stop. But clearly, this behavior removes me as a participant in setting prices in any meaningful way, since I don’t buy a lot of company X due to good news and I don’t sell a lot of company Y due to bad news.
Interest rates are still extremely low and investment money has to go somewhere. The yield on most high quality bonds is terrible. Money market, savings accounts and CD’s pay so little interest that it might as well be zero. It is easier than ever for the general public to invest in the stock market directly or through retirement plans.
In other words, it is just supply and demand. You have a lot of money looking for a place to go and the stock market is the only sensible place at the moment unless you want to do something much harder like invest in real estate. Its main competition is pure cash but most people don’t just sell huge amounts stocks to sit on a pile of cash unless there is a really good reason to.
Who cares what Trump is doing? As long as businesses are productive shouldn’t wealth be increasing over time? And this political stuff only seems meaningful because you are living thru it. History has had FAR greater events then Trump and look at the wealth of today vs 200 years ago.
I don’t see where ‘almost twice’ comes from. If I pull up the the US S&P 500 index ETF IVV and the Vanguard European Stock Index ETF the latter has outpaced the former by just a few % points since November 2016
That’s in USD. European stock markets are up less in EUR terms than the US is in USD terms (they don’t all use the Euro, obviously, but we’re speaking roughly and USD has declined v GBP and other non-Euro European currencies)
Anyway, you could find stock markets up way more than US in either their own or US currency terms (China for example) since last fall. But I don’t see how that would counter the point that a corporate tax cut is a positive for stocks. It simply is. Again noting ‘good for stocks’ doesn’t mean universally good necessarily. Also again noting you can never absolutely attribute a market move to one particular thing.