A way to think about the Trump stock market.
- Thread starter Arkady
- Start date
No. What's happening here is that you don't understand what I wrote.
What makes you think that?
The difference between growth stocks and value stocks doesn't alter my analysis, obviously. The point is the extra money shows up in the value of the stock, regardless of whether it's expected to be invested, held as cash, dividended out, used to buy back stock, etc. If it's invested or held as cash, then the value of the underlying asset goes up, so for a given number of outstanding stocks, their value must go up. Similarly, if a larger dividend is expected, then the value of the stocks needs to go up to reflect that. And if the money is used to buy back stocks, then the pro-rated value of the company, per outstanding stock, goes up, and the stock rises to reflect that. In each case, the money that isn't flowing out to the government winds up showing up in the stock price. The only way it wouldn't show up is if what the company plans to do with it is seen as having no value at all. For example, if it were possible for them to commit to setting the money on fire, such that they may as well have paid it to the government in taxes, then it won't impact the stock price.
As you can see, no matter what the company does with that money, within reason, it would result in an increased stock price, relative to if the company paid that money to the government in taxes. How big that increase in stock value will be depends on the difference between what the company would have paid, without the tax cut, and what it does pay, on average. Accounting for it isn't simple, because there's uncertainty as to future changes in taxes. Again, to look only at the case of a company dividending out the full amount, the value to the shareholder in year 1 is easy to calculate (the difference between the taxes paid at the prior effective tax rate and the new one), but then year 2 would be the present value of that difference, which involves (a) a present value calculation, (b) uncertainty about future profits, and (c) uncertainty about whether that tax law will stay unchanged. With every future year the impact of those three things grows larger, so it's harder and harder to account for the increased value. But, rational investors are going to factor in something based on best guesses. Stock buy-backs have a similar calculation -- the impact of the year 1 buy-back would be easy to calculate, but it gets less certain in future years. And that's even more true with investing in, say, plant expansion, since that adds even more delay and uncertainty about the impact. But, still, the expectation is that on average this will increase the value of the underlying company and thus of its stock.
So, the point isn't to suggest that this only works for dividend-paying stocks. The point is that no matter how the company treats that windfall, the stock should adjust upwards to reflect it. And a back-of-the-napkin calculation of how much is should have been expected to adjust given the average size of the windfall would tell us that essentially all of the stock gains since Trump became president could be accounted for just by way of that tax windfall for corporations. And that would help to explain why it seems to have shown up as a fairly rapid first-year increase, followed by a market that's gone nowhere for about a year now.
What makes you think that?
The difference between growth stocks and value stocks doesn't alter my analysis, obviously. The point is the extra money shows up in the value of the stock, regardless of whether it's expected to be invested, held as cash, dividended out, used to buy back stock, etc. If it's invested or held as cash, then the value of the underlying asset goes up, so for a given number of outstanding stocks, their value must go up. Similarly, if a larger dividend is expected, then the value of the stocks needs to go up to reflect that. And if the money is used to buy back stocks, then the pro-rated value of the company, per outstanding stock, goes up, and the stock rises to reflect that. In each case, the money that isn't flowing out to the government winds up showing up in the stock price. The only way it wouldn't show up is if what the company plans to do with it is seen as having no value at all. For example, if it were possible for them to commit to setting the money on fire, such that they may as well have paid it to the government in taxes, then it won't impact the stock price.
As you can see, no matter what the company does with that money, within reason, it would result in an increased stock price, relative to if the company paid that money to the government in taxes. How big that increase in stock value will be depends on the difference between what the company would have paid, without the tax cut, and what it does pay, on average. Accounting for it isn't simple, because there's uncertainty as to future changes in taxes. Again, to look only at the case of a company dividending out the full amount, the value to the shareholder in year 1 is easy to calculate (the difference between the taxes paid at the prior effective tax rate and the new one), but then year 2 would be the present value of that difference, which involves (a) a present value calculation, (b) uncertainty about future profits, and (c) uncertainty about whether that tax law will stay unchanged. With every future year the impact of those three things grows larger, so it's harder and harder to account for the increased value. But, rational investors are going to factor in something based on best guesses. Stock buy-backs have a similar calculation -- the impact of the year 1 buy-back would be easy to calculate, but it gets less certain in future years. And that's even more true with investing in, say, plant expansion, since that adds even more delay and uncertainty about the impact. But, still, the expectation is that on average this will increase the value of the underlying company and thus of its stock.
So, the point isn't to suggest that this only works for dividend-paying stocks. The point is that no matter how the company treats that windfall, the stock should adjust upwards to reflect it. And a back-of-the-napkin calculation of how much is should have been expected to adjust given the average size of the windfall would tell us that essentially all of the stock gains since Trump became president could be accounted for just by way of that tax windfall for corporations. And that would help to explain why it seems to have shown up as a fairly rapid first-year increase, followed by a market that's gone nowhere for about a year now.
I did. The S&P 500 has risen at an annualized pace of about 9.7% under Trump. It was about 13.9% under Obama and about 15.2% under Clinton.
Of course, that's just nominal gain, and doesn't account for inflation. Inflation has average an annualized pace of 2.0% on Trump's watch, for example, compared to 1.8% on Obama's watch. So, in real terms, it's like 7.7% growth on Trump's watch and 12.1% on Obama's. So, the pace of value growth in stock portfolios was about 57% higher, in real terms, on Obama's watch, than on Trump's. Trump's rule isn't as putrid as, say, Bush's. But it's definitely a big step back from what we got used to under his greatly superior predecessor.
Of course, that's just nominal gain, and doesn't account for inflation. Inflation has average an annualized pace of 2.0% on Trump's watch, for example, compared to 1.8% on Obama's watch. So, in real terms, it's like 7.7% growth on Trump's watch and 12.1% on Obama's. So, the pace of value growth in stock portfolios was about 57% higher, in real terms, on Obama's watch, than on Trump's. Trump's rule isn't as putrid as, say, Bush's. But it's definitely a big step back from what we got used to under his greatly superior predecessor.
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OldGaffer and Ian Jeffrey
It's not difficult. Do you know how to annualize a growth rate? It's junior-high math, so forgive me if you already know it, but I'll walk you through it, in case you've forgotten.
I'll do the calculation for Trump, then you can use the same method for the others to confirm I'm right there, as well.
First, go here:
^GSPC Historical Prices | S&P 500 Stock - Yahoo Finance
Click on the time period, hit "Max" then "Done" then "Apply." this will give you the data for the entire period of the S&P 500's existence. Hit "Download Data" and open it in Excel or another spreadsheet program, to make calculation easy.
So, Trump's first day in office was 1/20/2017, with the S&P 500's adjusted close that day being 2,271.31.... in theory, we could use the data from noon of that day, when he officially became president, but the close is close enough so it won't make any appreciable difference. The most recent day was 12/4/2018, with a 2,700.06 close.. To annualize, divide the second close by the first, raise it to a power of 1 over the fraction of a year, that has elapsed, and then convert that to percentage growth.
So, the second close is 1.1887677 times the first (2700.06/2271.31). 683 days lie between them (subtract the first date field from the second). There are 365.25 days per year for purposes of annualization calculations (to account for leap-years). So, you're raising 1,1887677 to the power of (1/(683/365.25)). You get 1.096882. In other words, keeping that average pace, the market would be 1.096882 times higher at the end of a single year. Convert that to a percentage increase and it's just under 9.7%..... which is the figure I quoted as the annual growth rate on Trump's watch.
To do it for other presidents, similarly just divide the last day by the first, raise it to one over the multiple of a year for each (e.g., raise it to about 1/8 for a president who was in office for two terms), then convert the result to a percentage of growth (subtract one, then multiply by 100).
--------------------------
If you're dubious about my mathematical method for annualizing, you can do a rough "reality check" on my figure, to make sure it produces a realistic result, by calculating what the S&P 500 would be after two full years of growth at that pace. In other words:
Year 0: 2271.31
Year 1: 2491.63 (year zero plus 9.7% of year zero)
Year 2: 2,733.32 (year one plus 9.7% of year one)
So, as you can see, if we had exactly two years of 9.7% growth for the S&P 500 for Trump, we'd expect it to stand at 2,733.32 -- which is 1.2% higher than it is right now.... which makes sense, because there's 47 more days to go before Trump hits the two-year mark, or about an eight of a year. So, if it's just 9.7% growth for the full year, you'd expect to be about 1.2 points short of that with this much of the year left.
I'll do the calculation for Trump, then you can use the same method for the others to confirm I'm right there, as well.
First, go here:
^GSPC Historical Prices | S&P 500 Stock - Yahoo Finance
Click on the time period, hit "Max" then "Done" then "Apply." this will give you the data for the entire period of the S&P 500's existence. Hit "Download Data" and open it in Excel or another spreadsheet program, to make calculation easy.
So, Trump's first day in office was 1/20/2017, with the S&P 500's adjusted close that day being 2,271.31.... in theory, we could use the data from noon of that day, when he officially became president, but the close is close enough so it won't make any appreciable difference. The most recent day was 12/4/2018, with a 2,700.06 close.. To annualize, divide the second close by the first, raise it to a power of 1 over the fraction of a year, that has elapsed, and then convert that to percentage growth.
So, the second close is 1.1887677 times the first (2700.06/2271.31). 683 days lie between them (subtract the first date field from the second). There are 365.25 days per year for purposes of annualization calculations (to account for leap-years). So, you're raising 1,1887677 to the power of (1/(683/365.25)). You get 1.096882. In other words, keeping that average pace, the market would be 1.096882 times higher at the end of a single year. Convert that to a percentage increase and it's just under 9.7%..... which is the figure I quoted as the annual growth rate on Trump's watch.
To do it for other presidents, similarly just divide the last day by the first, raise it to one over the multiple of a year for each (e.g., raise it to about 1/8 for a president who was in office for two terms), then convert the result to a percentage of growth (subtract one, then multiply by 100).
--------------------------
If you're dubious about my mathematical method for annualizing, you can do a rough "reality check" on my figure, to make sure it produces a realistic result, by calculating what the S&P 500 would be after two full years of growth at that pace. In other words:
Year 0: 2271.31
Year 1: 2491.63 (year zero plus 9.7% of year zero)
Year 2: 2,733.32 (year one plus 9.7% of year one)
So, as you can see, if we had exactly two years of 9.7% growth for the S&P 500 for Trump, we'd expect it to stand at 2,733.32 -- which is 1.2% higher than it is right now.... which makes sense, because there's 47 more days to go before Trump hits the two-year mark, or about an eight of a year. So, if it's just 9.7% growth for the full year, you'd expect to be about 1.2 points short of that with this much of the year left.
If you want to do the inflation calculation, here you go:
Consumer Price Index for All Urban Consumers: All Items
You annualize inflation the same way as anything else. Divide the end number by the baseline, raise that to a power that reflects the fraction or multiple of a year that has passed (e.g., 1/2 if it's been two years, 2/1 if it's been half a year), then convert the result to a percentage growth. Since the last index figure is for October (November isn't out yet, much less December), you can't apply it directly to the growth over a time period that extends past that. But you can come close enough by just assuming that the overall average annual pace for inflation for the Trump era is very close to the average annual pace through October (since it's unlikely we had the kind of hyperinflation or hyperdeflation in the last month and a week needed to meaningfully throw the figure in so little time).
By the way, if someone has a simpler annualization calculation, let me know. I derived mine myself -- it works, but there may be a quicker way to do it (including maybe some built-in Excel function I don't know about).
Consumer Price Index for All Urban Consumers: All Items
You annualize inflation the same way as anything else. Divide the end number by the baseline, raise that to a power that reflects the fraction or multiple of a year that has passed (e.g., 1/2 if it's been two years, 2/1 if it's been half a year), then convert the result to a percentage growth. Since the last index figure is for October (November isn't out yet, much less December), you can't apply it directly to the growth over a time period that extends past that. But you can come close enough by just assuming that the overall average annual pace for inflation for the Trump era is very close to the average annual pace through October (since it's unlikely we had the kind of hyperinflation or hyperdeflation in the last month and a week needed to meaningfully throw the figure in so little time).
By the way, if someone has a simpler annualization calculation, let me know. I derived mine myself -- it works, but there may be a quicker way to do it (including maybe some built-in Excel function I don't know about).
I have always used an Excel sheet for things like this, and would use inflationdata.com to get monthly inflation rates (or annual, depending on what I am doing). No special function required, though you could just do a single calc the way you did. I just create a table that shows every interval (whether daily, monthly, or whatever) between X and Y to get my result. If I am trying to derive an interest/growth rate, or something like that, I set the beginning and end to what I know them to be, using Goal Seek to work it backward. Does that make sense to you? (I know it works, but not so sure I described it comprehensibly.)
I haven't used Goal Seek for it, but I could give it a try. Here's what my annualizing method looks like as a single Excel formula:
=((((number2/number1)^(1/((date2-date1)/365.25))-1)*100%
So, for example, if something rose from 100 to 1000 in four years, it would be:
=((((1000/100)^(1/((1461)/365.25))-1)*100%
so:
=((10^0.25)-1)*100%
approximately
77.83% annualized growth
=((((number2/number1)^(1/((date2-date1)/365.25))-1)*100%
So, for example, if something rose from 100 to 1000 in four years, it would be:
=((((1000/100)^(1/((1461)/365.25))-1)*100%
so:
=((10^0.25)-1)*100%
approximately
77.83% annualized growth
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