Tuesday, February 14, 2017

What's up with stocks these days?

I don't really have anything to say about Michael Flynn, but I've been thinking for a while that I might start addressing the stock issue.

On election night, as it started to dawn on us that, yes, Trump was going to win, the stock futures tanked.  Investors were panicking because, well, Trump is an idiotic wack-job, and giving the most powerful job in the world to such a person destabilizes things.  Investors don't tend to like that.  So, on election night, watching the stock futures tank made sense.

Anyone check the markets lately?  They keep hitting all-time highs.  What's going on?

Let's be blunt about the mathematically defensible part.  Tax cuts.  With unified Republican control of government, we will soon see a bunch of tax cuts, probably on the corporate side.  Corporate tax cuts improve the bottom line of publicly traded companies, improving their earnings per share (investor jargon).  Stock prices need to adjust.  Whether Republican policies are good for the rest of the economy is a separate and less relevant matter from the perspective of stock prices, unless they are so bad that they overwhelm the positive direct effects of the tax cuts.  Stock prices are supposed to reflect valuation, and if corporate tax cuts are coming soon, then stock prices need to go up in anticipation of the improvement in profitability.  Stocks are a segment of the economy.  Even if no other segments are helped, that segment will be helped.

As I read through the business news stories, though, it is amazing how convinced many business commentators are that we will see "tax reform" rather than just a bunch of tax cuts.

What do they mean?  A simplification of the tax code.  The tax code is insanely complicated, and it gets more complicated every year.  Each year, there are more tiny carve-outs that benefit one tiny group.  What if we just got rid of those tiny carve-outs, and had a simple tax code at a lower rate for everyone?  Nice dream, right?

The last time we did anything even remotely like that was 1986.  Why?  Everyone with one of those tiny benefits fights hard to preserve them.

In other words, tax reform may be harder than healthcare reform.  We've done the latter more recently.  Anyone pinning their hopes and dreams on the former?  Um, I don't see it, and if that's why stocks are going up?  Well...

I have more to say on this, but events have a way of getting in the way, so we'll see.

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