A way to think about the Trump stock market.

Sep 2007
21,463
13,583
N48 51.489 E2 17.67119
#11
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.
To simply things further, 2017 was anticipation of the tax cut and 2018 some of the reality of the tax cut. The rest of the reality will be the full on bear market that's coming.
 
Jul 2014
31,044
7,937
midwest
#12
To simply things further, 2017 was anticipation of the tax cut and 2018 some of the reality of the tax cut. The rest of the reality will be the full on bear market that's coming.
They have been saying a "bear market is coming" since way before Trump was elected.

There is ALWAYS a "bear market coming".

Just as there is always another bull market coming.

These things go in cycles.

Always have, and always will.
 
Jan 2014
14,875
3,694
California
#15
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.
Mr. Arkady,

Obviously, you know nothing about investing and how the market works. Stock valuation is based on a number of thing, only one of those is profit margin. If a stock's value was based on profit, Tesla stock would be worthless.

LOL, then you compare your ridiculous hypothetical to the S&P as a basis for your ridiculous contention that the S&P has underperformed.

Dishonesty, thy name is liberal.
 
Sep 2017
3,970
4,904
Massachusetts
#17
Mr. Arkady,

Obviously, you know nothing about investing and how the market works.
Actually, I'm a successful investor. I've beaten the S&P 500 in 16 out of the last 18 years and have compiled a $2 million portfolio with relatively modest contributions.

Stock valuation is based on a number of thing, only one of those is profit margin
Do you imagine I said stock valuation is only based on profit margin? What made you imagine that, specifically?

LOL, then you compare your ridiculous hypothetical to the S&P as a basis for your ridiculous contention that the S&P has underperformed.
You misunderstood. Let me see if I can put it in much simpler terms that even you can follow. Would you expect stock values to rise or fall if there's a large corporate tax rate, other things being equal? By how much? My argument is that the rise we've seen under Trump is actually somewhat smaller than the rise we'd have expected just from the tax cut, other things being equal.
 
Jan 2014
14,875
3,694
California
#18
Actually, I'm a successful investor. I've beaten the S&P 500 in 16 out of the last 18 years and have compiled a $2 million portfolio with relatively modest contributions.



Do you imagine I said stock valuation is only based on profit margin? What made you imagine that, specifically?



You misunderstood. Let me see if I can put it in much simpler terms that even you can follow. Would you expect stock values to rise or fall if there's a large corporate tax rate, other things being equal? By how much? My argument is that the rise we've seen under Trump is actually somewhat smaller than the rise we'd have expected just from the tax cut, other things being equal.
Mr. Arkady,

and yet, you know little or nothing about how the market works. Kudos to your financial advisor for keeping a fool from parting with his money.

You would expect the market to react positively because of lower tax rates because it frees up more money for a companies to invest and expand. That is exactly what happened with the anticipation of lower tax rates buoyed the markets in 2017. The current market uncertainty is due to other issues, most notably the worries about trade wars. Who knows how far the markets would have fallen if companies were not in such favorable financial positions due to lower tax burdens.
 
Sep 2017
3,970
4,904
Massachusetts
#19
Mr. Arkady,

and yet, you know little or nothing about how the market works. Kudos to your financial advisor for keeping a fool from parting with his money.
I've never used a financial adviser. Why let someone else take a cut of my earnings when I'm doing so well on my own?

You would expect the market to react positively because of lower tax rates because it frees up more money for a companies to invest and expand.
Nice try, but incorrect. It doesn't matter whether the market expects the company to use the difference to invest and expand, or whether it expects the company to pay out the difference in dividends, or to use it to buy back its own stock. ALL will raise the price of the stock. The key is simply whether the money is being taken out of the company (to go to the Treasury) or not. If the plan was for it to be taken out of the company, and the stock reflected that, and then the plan changed, then in relative terms it's no different than if someone had handed the company that same money as a windfall. That windfall makes the company more valuable by that amount, and that should be reflected in the stock price if the market is rational.
 
Jan 2014
14,875
3,694
California
#20
I've never used a financial adviser. Why let someone else take a cut of my earnings when I'm doing so well on my own?



Nice try, but incorrect. It doesn't matter whether the market expects the company to use the difference to invest and expand, or whether it expects the company to pay out the difference in dividends, or to use it to buy back its own stock. ALL will raise the price of the stock. The key is simply whether the money is being taken out of the company (to go to the Treasury) or not. If the plan was for it to be taken out of the company, and the stock reflected that, and then the plan changed, then in relative terms it's no different than if someone had handed the company that same money as a windfall. That windfall makes the company more valuable by that amount, and that should be reflected in the stock price if the market is rational.
Mr. Arkady,

Again, you know nothing about how markets work. If that was the case, the majority of the companies that pay no dividends would never move. Please look up the difference between growth stocks and value stocks.
 

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