We awoke yesterday to find that the pre-opening projection for the Dow Jones Industrial Average was a bit over 26,000, a number that the Dow had never reached, and which was more than 200 points higher than the Friday close, the last time the markets were open.
As I wrote this, with the markets still open yesterday, the Dow was at 26,060 and well over 250 points higher than that previous close (it closed back under 26,000 but still near the record, and this morning it is projected up another 100 points).
The Dow being only an index of a few dozen companies, it makes sense to note that the rest of the securities in American companies were increasing in value as well. U.S. equities have increased well over five trillion dollars in value since the inauguration of Donald Trump less than a year ago, and well over seven trillion since his election.
That means, of course, that Americans' savings that were invested in mutual funds, and shares of American companies have soared. Ask the person on the street who has a 401(k) how their values have changed since the 2016 election, and you will likely get a smile and an upraised thumb.
Of course, if we are to mention the extraordinary rise in the stock market in the last year under President Trump, the smug worshipers of our previous president will rush to point out that there was also a rise in the market under Barack Obama, from 8,800 in November 2008 when he was elected, to 19,100 in November 2016, shortly before the election of President Trump. "Why shouldn't Obama get credit for the rise in the Dow over his administration, yeah, huh?"
Well, that's a good question, but to be honest, I answered that already. Several years ago, I wrote a piece on that odd phenomenon. You are highly encouraged to read it, but to be rather summary about it, I made the point that the rise in the market was not only slow but not really related to corporate performance.
The "slow" part is relevant; in fact the performance of the Dow in the year before Obama was elected is relevant -- a 4,500-point drop from 13,300. It is relevant, because the economy as represented by the Dow had a year previously shown a certain level reflecting the innate level of strength of the companies (and the environment) as constituted then. One could argue that half of the gain in the Dow over the eight years of the Obama administration was simply the natural, cyclical recovery of value already established.
On the other hand, President Trump was elected at a point where the Dow was already near its all-time high, and the economy had already established values for those companies, relative to the legal and regulatory environment in which they operated. The 7,000-point gain in Mr. Trump's first year of office is amazing not only because it was done in a single year, but because virtually all of it entails values never before achieved in the market.
And that is critical in distinguishing the long-term, creeping rise in the Dow under Obama from the current, rocket-fuel blast in the market. As I wrote in the referenced article, and which was its fundamental point, the Dow under Obama rose because there was no other place for investment capital. Interest rates were essentially zero, meaning that the only moderate-risk growth instrument available to beat inflation was the stock market. Demand for savings accounts was nil, demand shifted to equities, and their price went up based on demand -- not so much on the fundamental strength of the underlying companies.
And that growth under Obama was slow because there was little capital around due to the burdensome tax policy of his administration.
Now the companies in that time had, actually, increased that strength some, but not because Obama wanted them stronger. The over-regulating nanny-state types in his Cabinet had made, among other things, hiring employees so expensive, from Obamacare to quotas, that it became cheaper to automate, to robotize, and to hire fewer, smarter and harder-working people. Fewer, better employees meant lower expenses and thus better performance.
The economy inherited by President Trump thus started out in a place of retrenchment and, thus, solidity driven by a need for survival. As soon as it came to understand that the Trump Administration would take the position that regulations needed to be removed far more than imposed, and that a massive tax overhaul was in the offing, industry felt freer to invest -- and investors felt that demand would rise and, therefore, the innate value of the companies would rise in parallel.
To summarize -- the $7 trillion in new value in the market is specifically the result of the economy's assessment of the value of industry, that with massively lower taxes, significant deregulation and the attendant hiring that would be necessary to sustain it, the true value of the nation's companies would indeed rise.
There is a lot of difference between stock prices going up by default, as they did for eight years, and going up because the economy is roaring and the demand curve is hugely and unprecedentedly positive.
I'll take the outcome of this administration's efforts, thanks.
Copyright 2018 by Robert Sutton
Like what you read here? There's a new post from Bob
at www.uberthoughtsUSA.com at 10am Eastern time, every weekday, giving
new meaning to "prolific essayist." Appearance, advertising, sponsorship and interview inquiries cheerfully welcomed at
bsutton@alum.mit.edu or on Twitter at @rmosutton.
No comments:
Post a Comment