Stock Market Gains 2017

     

Kelly Evans on CNBC

Twice a week I go to a gym in a nearby Senior residential facility for a light workout. Most of the residents take exercise classes in the morning so when I go in the afternoon, I am virtually alone. I like to turn on the TV and watch the business news on CNBC for an hour. I like CNBC because it is much less political than Fox News, CNN, or MSNBC. Also, during the commercials the stock ticker keeps streaming at the bottom of the screen.

I usually watch “The Closing Bell” jointly anchored by Kelly Evans and Bill Griffith. It is a real plus that Evans and the other women on the show, while as attractive as those on the other cable news networks, do not have to expose their legs or show excessive décolletage. They are free to report the news and interview their guests without appearing as bimbos.

Usually the pace is rapid fire with guest panelists going back and forth in the limited time available. Evans and Griffith are intelligent and curious questioners who do a good job of keeping their guests to the point. Often, the panelists will disagree and it is apparent that no one has the proverbial crystal ball. Even when they marshal impressive statistics, it is obvious that these can be interpreted in different ways. One guest recently argued that the improved earnings of a company would likely cause its stock to drop in price.

Once in a while, a breath of truth will come through the torrent of words. Just the other day a panel was discussing how the proposed cut in the corporate tax rate would affect the airlines. One commentator suggested that the airline companies might use the tax savings to buy back their own stock to the benefit of stockholders. But the other panelist pointed out that the cut in the corporate tax rate will have little effect on the airlines because they don’t pay tax anyway. What! Even the anchors gasped. He went on to explain that the airlines had such large loss carryovers that they would not have any tax liability for years no matter what the rate.

I thought this observation was right on the money. It should be obvious that rather than give up 35% of their profits corporations have found ways to shelter those profits from high tax rates. One of those ways was to shift operations overseas to lower tax countries, a tactic that the lower rate is designed to make less attractive.

I think most of the opposition to tax reform comes from people who just hate President Trump and do not want anything he supports to be successful. The well to do progressives who hate Trump should ask themselves how Trump has actually hurt them. Has the country really gone to Hell since his election over a year ago?

So far this year the major stock indexes have gone up dramatically. The Dow Jones Industrial Average (DJIA) closed yesterday at 24504 up 24% so far this year. The tech heavy NASDAQ average has lagged the DJIA but still is up 17.64% this year, and the broad Standard and Poor’s stock average is up 19%.

I do not want to give President Trump credit for these gains although his critics will be quick to blame him if the market goes down next year. I suspect that the increase in stock prices has little to do with politics. The dramatic rise in the stock market began during the Obama administration and nothing that Trump or the Federal Reserve have done has impeded it.

In the first place, with returns on other investment being so low, where else have people been able to go to gain a decent return? Secondly, it would appear that the number of public companies is shrinking. We have high demand for stocks but the supply of eligible companies is getting lower. Whatever the cause, those who invest in the stock market do not seem to believe that the country is in bad shape after a year of Trump.

These stock gains have benefitted not just the rich but everyone. This year has seen record inflows of money into stock index and hedge funds. A large share of this money comes from pension funds. In effect, a pension fund that needs to average 8% a year has made two or three times that amount this year. Theoretically, it could just cash in and not make anything for another year or two.

People whose retirement savings are in 401k plans or IRAs have seen similar results. Anyone looking at their quarterly statement will see significant gains this year. The only problem is that their new contributions will buy fewer shares in their funds.

It could be argued that the poor do not share in these stock market gains but the poor paid very little tax under the present tax code, and will pay even less under the new. But business profits and stock market gains will allow well to do individuals to pay the taxes that shore up this country’s social service safety net.

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