Thursday, March 2, 2017

What's Moving the Market?

James Freeman offers an interesting analysis of stock market action, before and after Trump. From the new Best of the Web column in the Wall Street Journal:

Markets have been on a tear since Election Night, with the Dow up nearly 14% through Tuesday’s close. This is based on Mr. Trump’s promises to reduce the burden of taxes and rules imposed by Washington. For years prior to his election, markets were rising thanks in large part to historically low interest rates engineered by the Federal Reserve. But investors and businesspeople didn’t really believe Washington could manufacture prosperity. So big companies borrowed at low rates and then used the money to buy other companies or buy back their own stock or just sat on cash instead of investing in new equipment. This lack of investment meant we never got the productivity gains that make us all richer. Mr. Trump has made business operators more optimistic but it’s not clear he’s yet changed their behavior.


Ares Olympus said...

The market gains certainly are impressive, after something like 2 years holding steady, and fearful every time the Fed threatened to raise their rates by a tiny 1/4 point.

I don't know if its fair to judge markets as having anything to do with the decisions of leadership within a company. We can say that investors imagine a bull market on the promises of Trump's lowering taxes and regulations, so everyone can imagine this will make it easier for large corporations to do more things without worrying about breaking rules, and maybe they'll soon be able to keep a larger fraction of their profits, which can be distributed back to shareholders.

So if that's how things are expected to work, then all things being equal, future corporate profits ought to be set to soar, and people who have been holding money back perhaos are now willing to buy more stocks, perhaps moving from low-interest bonds, and it all seems good. And early buyers get the best returns, and the herd follows the leaders.

However, but I do see an alternative narrative that still holds sway - that low interest rates have encouraged more mergers/acquisitions that helped make a few sellers rich, but leaving remaining corporations in higher over all debt.

And cheap debt means more speculative money, and people looking for "the next big thing" to bid prices up early, and withdraw when they get their returns. And as cheap debt disappears, the number of buyers decreases, and stock prices will go down again.

So my intuitive assessment considers that currently perhaps everything on average is 40% overvalued from a sober market, and so perhaps Trump's promises to reduce regulations and taxes is a real boost in gross value, I'll doubt its worth 40%, and so we're still far overvalued from sober assessments.

And of course Trump's presidential infancy is still a huge gamble, so there's surely losts of investors who are looking for the smallest signs to "sell first", and Trump will provide many of them. And some of this surely is intentional as well, so the whole game of short term stock purchases is to "buy first, sell first" riding the bull, even if the bull itself is built on bull, like Trump's arrogance "Only I can fix it" to every problem ever met by mankind.

So I'll staying firmly out in this market, but maybe after the next crisis, and 40-80% price drops, I'll see what is worth betting on.

The downside risks have been too much for me after 2013 or so, I don't know why anyone would risk their retirement funds for a chance of another year or two of cheap-debt greased gains.

But eyes-wide-open, let the fools and their money be parted, or doubled, as the Fates dictate. I won't be envious either way.

trigger warning said...

The best insight I've ever read on the stock market was given by that true and tested market genius, JP Morgan, to a financial reporter. When asked what he thought the market was going to do in the near term, he replied...

"It will fluctuate."

But you can take this to the bank: the market, having gone up, will go down again. I guarantee it.

Dennis said...

The first thing one should ask themselves when considering investment is how much risk one can tolerate and then start to consider the various forms of investment available. Also, in order to take into consideration the ups and downs of the market one needs to diversify. To stay in fear of investing is to lose. I have not sold during any of the downturns because one does not lose or gain until one sells. TW is correct that the market goes up and the market goes down, but the general trend line is up. DJI as of 8:35 this morning is 21,115.55. Stocks I bought on weighted average investments of $200 per month several years ago, money I did not care whether I lost or not, have done quite well. I have eschewed selling because of the tax ramifications, but Trump's tax plans may change my mind. Life is a gamble, but to fear is to lose in that life. The best things in my life have been because I was willing to take a chance and to win or lose as is the possibility in all things in life.
Trump could be very good for those who invest in the market. Sadly, most people do not understand how much their retirement depends on a healthy market and economy.

Dennis said...

I started out life with nothing and if it ends that way I have enjoyed the ride because life is there to be lived.

trigger warning said...

D: "Sadly, most people do not understand how much their retirement depends on a healthy market and economy."

Always true. Unfortunately, the Progressive Fed's interest rate policy has eliminated the lowest-risk investment choices for middle-class and working-class savers, and everyone has been funneled into equities.

An historically-rising market, however, means the investor doesn't lose money, he loses time. If the market suddenly goes down, and it's time to retire, the investor is stuck. As happened to many in 2008, thanks to the good intentions of Community Reinvestment Act regulations. Will we ever escape the idiocy of nookular engineer and President Jimmah "Rabbitslayer" Carter?

Dennis said...


I have to agree. I rue the day when the Federal Reserve was established. I would suggest that they have done more damage than good. A lot like the UN in that it never allows the conflicts to be solved. Everything becomes too big to fail.
Also rue the day I voted for Jimmie Carter.

trigger warning said...

Dennis, I voted for him, too. I consider it one of the great mistakes of my youth. Who knew we would come to miss the Shah of Iran?

Ares Olympus said...

trigger warning said... Unfortunately, the Progressive Fed's interest rate policy has eliminated the lowest-risk investment choices for middle-class and working-class savers, and everyone has been funneled into equities.

One might consider this is a conspiracy of sorts, and another reason why the markets are overall overvalued. Low interest rates encourage people moving into higher risk markets then they should, and setting up the next economic crisis where 25% of investors will pull money out near the bottom of the next crisis.

The open question for me is whether low-interest rates are here to stay (because fundamentals prevent anything else) so this is the new normal, and what the next big trick bankers can do to cajole another round of true believers to stay in longer than they ought.

It's a crazy game we're playing, and everyone would prefer to keep their head in the sand. It makes no sense that we solved no real problems after 2008, and doubled-down on our debts, and still believe this all makes sense, that all of us can sell first, and get what we think we have.