Sunday, November 19, 2017

Donald Trump's Stock Market

There's no denying the melt-up of the stock market since Trumps election. The S&P is up 21% from Oct. 2016 to Oct. 2017. Impressive. And these are the generous numbers. When I look at the 1 YR performance as of today, the return is 17.17%.

During the Obama Administration the S&P averaged a 14.88% return per year. There were two years where the S&P was in single digits and they were low single digits. I have difficulty believing Trump will exceed that average but only time will tell.

A factor that will impact how well the stock market performs in the future is tax reform, which is actually just a tax cut, that if history is to be believed, will increase the national debt and which will put downward pressure on GDP. The promise of tax reform and a general bias of the Republican Party for business interests is a contributing factor in the stock market rise, along with continued low, perhaps even negative real interest rates.

The Kennedy tax cut reduced marginal rates that were at 90%. The 1981 Reagan tax cut reduced them from 70% to 50%. I think the top tax rate is now 39%. The economic law of diminishing returns probably applies to tax cuts as well, which is why I think we need radical reform and not just another tax cut. This one will have a small initial positive impact but will quickly fizzle out leaving us with at least $1.5T in additional debt.

I'm not a big fan of giving presidents credit or blame for the actions of the economy. Presidents can and do have a responsibility to help set economic goals. But it would be nice if they have some basic understanding of economics. President Trump said the following in an interview with Sean Hannity last month.

“You know the last eight years, they borrowed more than it did in the whole history of our country. So they borrowed more than $10 trillion, right? And yet, we picked up 5.2 trillion just in the stock market,” Trump told Fox News’ Sean Hannity in an interview on Tuesday. “Possibly picked up the whole thing in terms of the first nine months, in terms of value. So you could say, in one sense, we’re really increasing values. And maybe in a sense we’re reducing debt. But we’re very honored by it. And we’re very, very happy with what’s happening on Wall Street.” Parsing Trump comments can be difficult under the best syntax. But the implication here seems to be that $5.2T in equity gains reduces government debt? I don't think any further comment is necessary.

This didn't get a lot of play in the MSM and I haven't seen a clarification. I guess this one just fell off the table.