Stock Indexes and Success

Today the jobs number will be released. It’s probably going to be a good number. The number has nothing to do with Trump being elected. He’s only 7 weeks in. Ramping up hiring takes a lot longer than that. Since Trump was elected, the stock market has been on a tear higher. However, Obama supporters will tell you he enjoyed a big stock market rally too. So will Bill Clinton and Ronald Reagan supporters.

That should tell you two things. First, never go short America. Second, the stock market is a poor predictor of whether a President is successful or not.

A lot of people on Wall Street are unhinged.  They are shorting the rally because they are letting their political beliefs get in the way of judgment.  I have also seen this in other business silos.  I made the same mistake in 2009.  I let fear and angst consume me and I made some pretty bad trading decisions.

Expectations have certainly changed. The expectations would be far different if Hillary had won. I was speaking with my friend Joe Brusuelas last night. He is the Chief Economist for RSM.  You might see him on television occasionally.  He relayed a statistic to me that had me jumping out of my chair. During the Obama Presidency, at least 3000 new regulations hit the federal register. Those regulations are directly attributable to $850 Billion in dead weight economic loss. That’s shooting yourself in the foot. That’s one reason GDP was so terribly anemic under Obama.  I knew it was bad, but I didn’t know it was that bad.

Trump has pledged to get rid of a lot of unnecessary regulation.  I loved his executive order that for every new regulation, two have to be repealed.  Putting unbiased cost/benefit analysis into regulation writing will be very beneficial.  He’s also pledged to decrease corporate taxes.  That needs to be done and will help cure the dead weight loss problem. Heavy regulation and poor tax codes are two factors that help create income inequality.

How high can the market go if they redo regulation and redo taxes to make them more economically efficient?  No one knows.  The key is you can never be short America.  The market will be higher twenty years from now than it is today.

Dead weight loss is covered in the first week of any reputable Microeconomics course.  If you don’t know what dead weight loss is, here is the definition.  It is the loss of economic efficiency in terms of utility for consumers/producers such that the optimal or allocative efficiency is not achieved.  Deadweight loss can be stated as the loss of total welfare or the social surplus due to reasons like taxes or subsidies, price ceilings or floors, externalities and monopoly pricing. It is the excess burden created due to loss of benefit to the participants in trade which are individuals as consumers, producers or the government.  Here is a graph so you can visualize it.

An example of a government program creating deadweight loss is Obamacare.  Another example would be the ethanol subsidy.  Workers bear the cost of payroll taxes. There are scads of examples.  Our governments are riddled with them.

So today when the market goes up, it’s not because of Trump.  It’s because of market expectations.  If the market goes down, it doesn’t hate Trump.  It’s just altered expectations.

  • JLM

    The market is not a referendum on governing philosophy, on that we agree; however, part of market sentiment is the assessment as to whether the economy is going to get better, worse, or drift sideways.

    On that one ingredient, Pres Trump is a driver of higher values.

    As to the burden of gov’t regulation, when regulation is reduced — my favorite real world example is the elimination of the Obama EPA navigable waters executive order, one of the most intellectually dishonest acts in the history of the country — optimism flows into the void.

    For the first time in a long time, I am optimistic about the future of the size of gov’t, tax policy (which contrary to a lot of media dupes hasn’t been touched in 30 years except for increases such as though hidden in Obamacare), the burden of regulation, the chance for modest reform of healthcare, a better role for the US and peace, stability thereafter.

    I am optimistic and optimism is the oxygen which makes markets flare into flame.

    One of the other drivers of the stock market is the incessant flow of IRA and 401K money into mutual funds on a monthly and quarterly basis. A lot of people got burned, but they never changed their allocations. More money just keeps pouring in and driving prices higher.


    • Had a person tell me they think ETF’s are in bubble territory.

      • JLM

        Bit hard to believe that because an ETF is directly related to the underlying securities and either trades at a little discount or a premium.

        The underlying securities might be bubblicious but the ETF itself? Doesn’t seem possible.

        I am often wrong and I love ETFs. Big contra play is Mexico ETF or PRLAX. Ready to boom?

        Big game tonight — Heels v Duke.

        SXSW getting a little nutty here in the ATX.