A way to think about the Trump stock market.

Sep 2017
3,973
4,904
Massachusetts
#1
Picture a company with $100 in profits, which dividends out all its after-tax profits. What is the value of owning that company to its owner, stated as a one-year income stream? Well, if it pays 35% in tax, the value of the dividend is $65 ($100 minus $35 of taxes). If it pays 21% in tax (the new max rate after the Republican cut), the value is $79 ($100-$21). The difference is about 21.5%. So, in that simplified example, the stock's price should rise about 21.5%, just based on the tax cut, if all other things are equal.

Of course that's a very simplified model. In reality companies don't dividend out all their after-tax profits. They can use them for stock buy-backs, or retain the money for future investments, etc. And the value of a company is understood as the present value of all future dividends, not just one year's dividends. And the average effective corporate tax rate was lower than 35% before, and will be lower than 21% now. But fundamentally the math works out the same way: the value of owning a corporation will rise proportionate to the decline in the corporation's tax, and so a big decline in corporate taxation should mean a one-time big boost in stock values.

So, how does that hypothetical 21.5% increase in stock values compare to what has actually happened on Trump's watch? Well, turns out the S&P 500 is worth only 18.9% more today than it was when he was sworn in. So, in rough terms, nominal stock values have DECLINED on his watch, after offsetting for the one-time tax handout. Some of that may be because stocks had already begun factoring in the one-time boost before he was even sworn in, as investors surveyed the political landscape in late 2016 and realized the Republicans would be gift-wrapping a present for the investor class in the coming year. But, what we're seeing looks a lot like what we'd expect if the market had been artificially inflated with a one-time shot of tax-policy steroids: 2017 was unusually strong, and 2018 has been entirely flat.
 
Mar 2012
50,061
32,931
New Hampshire
#2
Picture a company with $100 in profits, which dividends out all its after-tax profits. What is the value of owning that company to its owner, stated as a one-year income stream? Well, if it pays 35% in tax, the value of the dividend is $65 ($100 minus $35 of taxes). If it pays 21% in tax (the new max rate after the Republican cut), the value is $79 ($100-$21). The difference is about 21.5%. So, in that simplified example, the stock's price should rise about 21.5%, just based on the tax cut, if all other things are equal.

Of course that's a very simplified model. In reality companies don't dividend out all their after-tax profits. They can use them for stock buy-backs, or retain the money for future investments, etc. And the value of a company is understood as the present value of all future dividends, not just one year's dividends. And the average effective corporate tax rate was lower than 35% before, and will be lower than 21% now. But fundamentally the math works out the same way: the value of owning a corporation will rise proportionate to the decline in the corporation's tax, and so a big decline in corporate taxation should mean a one-time big boost in stock values.

So, how does that hypothetical 21.5% increase in stock values compare to what has actually happened on Trump's watch? Well, turns out the S&P 500 is worth only 18.9% more today than it was when he was sworn in. So, in rough terms, nominal stock values have DECLINED on his watch, after offsetting for the one-time tax handout. Some of that may be because stocks had already begun factoring in the one-time boost before he was even sworn in, as investors surveyed the political landscape in late 2016. But, what we're seeing looks a lot like what we'd expect if the market had been artificially inflated with a one-time shot of tax-policy steroids: 2017 was unusually strong, and 2018 has been entirely flat.
But one has to wonder if that matters anymore? It seems profits, bonuses and incomes seem to matter most. You see these companies making enormous profits and then laying off while the CEO gets a huge bonus. I guess what I am asking is are we looking at the wrong metric? Its not that 2018 was flat but instead how was executive compensation? Because that seems to go pretty far in political bonus points.
 
Sep 2017
3,973
4,904
Massachusetts
#3
But one has to wonder if that matters anymore? It seems profits, bonuses and incomes seem to matter most. You see these companies making enormous profits and then laying off while the CEO gets a huge bonus. I guess what I am asking is are we looking at the wrong metric? Its not that 2018 was flat but instead how was executive compensation? Because that seems to go pretty far in political bonus points.
Politically, I expect executive compensation matters a whole hell of a lot more than most people factor it in. It's not the everyday investors who fund political campaigns, much less hand out seven-figure salaries to government officials after they pass through the revolving door to the private sector. It's senior executives. So, as long as executive incomes remain high enough, the politicians seen as playing ball are going to be rewarded, even if the everyday investor gets hosed.

I also think the math probably works out differently when you have both (a) a lot of corruption, and (b) a lot of stock volatility. From the perspective of Joe Blow investor, slowly trickling money into his retirement account, long-terms average returns are what matter. But for the ruling class in this country, who get tips on when to buy and sell, long-term returns needn't matter at all. If stock values are bouncing up and down 3% per day for a year, with no meaningful net change, but you have a "lucky" pattern of buying before they bounce up 3% and selling before they bounce down 3%, you're going to get rich doing it.
 
Likes: Panzareta
Mar 2012
50,061
32,931
New Hampshire
#4
Politically, I expect executive compensation matters a whole hell of a lot more than most people factor it in. It's not the everyday investors who fund political campaigns, much less hand out seven-figure salaries to government officials after they pass through the revolving door to the private sector. It's senior executives. So, as long as executive incomes remain high enough, the politicians seen as playing ball are going to be rewarded, even if the everyday investor gets hosed.

I also think the math probably works out differently when you have both (a) a lot of corruption, and (b) a lot of stock volatility. From the perspective of Joe Blow investor, slowly trickling money into his retirement account, long-terms average returns are what matter. But for the ruling class in this country, who get tips on when to buy and sell, long-term returns needn't matter at all. If stock values are bouncing up and down 3% per day for a year, with no meaningful net change, but you have a "lucky" pattern of buying before they bounce up 3% and selling before they bounce down 3%, you're going to get rich doing it.
I always think that these wild days are in part Trumps way of helping his buddies make good buys and sell on the highs. As you say it doesnt matter to the everyday guy but the very wealthy uses these days to buy and sell massive blocks of stock. I cant think of the name but there was one they spoke of on CNBC as making millions playing just Apple and Amazon stock with the various ups and downs. But it does trickle down to an extent. For example, in 2010 our management sat the workers down and told us we no longer would get any beneifits because of the ACA (we had less than 50 employees). To a company that had paid 100% of our healthcare, that was devastating. It also began most of the workers voting against anything Obama did. So the companies can use this to their advantage whenever they want.
 
Sep 2017
3,973
4,904
Massachusetts
#5
I always think that these wild days are in part Trumps way of helping his buddies make good buys and sell on the highs. As you say it doesnt matter to the everyday guy but the very wealthy uses these days to buy and sell massive blocks of stock. I cant think of the name but there was one they spoke of on CNBC as making millions playing just Apple and Amazon stock with the various ups and downs. But it does trickle down to an extent. For example, in 2010 our management sat the workers down and told us we no longer would get any beneifits because of the ACA (we had less than 50 employees). To a company that had paid 100% of our healthcare, that was devastating. It also began most of the workers voting against anything Obama did. So the companies can use this to their advantage whenever they want.
It's said that rank-and-file workers can be that stupid. I've seen the same thing from companies, where they make moves to hurt their employees and then successfully pass the blame along to politicians who, in fact, have been fighting to help the employees. Most people are suckers.
 
Mar 2012
50,061
32,931
New Hampshire
#6
It's said that rank-and-file workers can be that stupid. I've seen the same thing from companies, where they make moves to hurt their employees and then successfully pass the blame along to politicians who, in fact, have been fighting to help the employees. Most people are suckers.
Well its wallet economics. If people have a dollar less they need someone to blame. That can be management, executives or politicians. Especially nowadays where fewer working class people have a lot of savings, every dollar matters more. Even if its a long term better idea. Its a dollar they dont have today.
 

Similar Discussions