Why is the market high -- when we are having political instability ?

[Unionville]

I learned a long time ago that the stock market "likes gridlock" in terms of: it does not like sudden changes, political events or anything that is unpredictable. Between the serious turmoil that is going on in our country where people wake up everyday not knowing what new odd thing our president has done, I can only predict this stock market is living in denial and headed for a major crash until things settle down.  Even if wall street thinks they are going to get great business tax breaks from Trump -- those things can never override the political instability of this government, right now and in the foreseeable future.

[lost_in_the_endless_aisle]

Screwing around with corporate taxes--assuming the stranger variants drop off the map--will greatly boost corporate after-tax profits, thereby making the market appreciation neutral with respect to P/E ratio for some level of expected tax reduction. Then the conventional wisdom is Cohn and Mnuchin get Trump to shut the hell up on protectionist policies and tinker with financial regulations (e.g. Dodd-Frank) to the benefit of investment banks. Finally, energy stocks are up on anticipation of fewer environmental and other regulations.

Essentially the market is not pricing in any sort of Trumpocalypse on the horizon, and though I think he is a fool and the Republicans spineless, they might pass a few beneficial reforms by pure accident.

[Unionville]

Screwing around with corporate taxes--assuming the stranger variants drop off the map--will greatly boost corporate after-tax profits, thereby making the market appreciation neutral with respect to P/E ratio for some level of expected tax reduction. Then the conventional wisdom is Cohn and Mnuchin get Trump to shut the hell up on protectionist policies and tinker with financial regulations (e.g. Dodd-Frank) to the benefit of investment banks. Finally, energy stocks are up on anticipation of fewer environmental and other regulations.

Essentially the market is not pricing in any sort of Trumpocalypse on the horizon, and though I think he is a fool and the Republicans spineless, they might pass a few beneficial reforms by pure accident.

You should write books.  You have a great way with words.  I laughed out loud.

[lost_in_the_endless_aisle]

Thanks, my inspiration comes from following a certain prominent individual's twitter account. Also, was Obama too soft on Russia? Sad.

[talltexan]

I think the trick with the Trump trade is that the upside scenarios are easy to quantify, measure, and predict, while the downside scenarios are difficult to imagine and price. So a lot of people are just not bothering.

[frugledoc]

I learned a long time ago that the stock market "likes gridlock"

You misunderstood and have learned this wrong. Time to unlearn it.

[Indexer]

As noted lower corporate taxes = higher after tax profits.

If companies can bring the 1 trillion overseas back to the US tax free the assumption on Wall Street is that most of the money will go towards stock buybacks.

If capital requirements are lowered for banks then they may have billions, maybe even hundreds of billions, that they can put towards stock buybacks.

Energy could benefit from environmental deregulation.


There is political instability on a whole lot of issues, but not tax reform. Trump and Ryan are pretty close there, close enough to get a deal done. Now, if Trump keeps wasting time and political capital on Muslim bans, rumors about Russia, and if they botch Repeal and Replace... then tax reform gets harder... then you might have some instability.

For me this is all fun theory. I'm fully invested, buy and rebalance. :)

[aschmidt2930]

Most of the perceived "instability" is purely news headlines at this point.  Electing Donald Trump didn't suddenly turn the US into a Banana Republic.

[Gunny]

Most of the perceived "instability" is purely news headlines at this point.  Electing Donald Trump didn't suddenly turn the US into a Banana Republic.

+1.  The media is great at taking sound bites and isolated incidents and making them into much larger issues and swaying opinion toward a certain agenda.  Having said that, I wish Trump would be more "presidential" in his approach to governing. He's his on worst enemy when it comes to providing the media fodder to use against him.  Having said THAT, I'm liking the reaction of the market to this administration thus far.  Let's hope that future changes to corporate and finance regulations and easing of environmental policies are not too traconian resulting in negative consequences.  Some regulation is needed to stave off anarchy, too much can paralyze a society. 

[talltexan]

People have offered two examples of glaring mismanagement of George W. Bush.

1. The Iraq War
2. Hurricane Katrina

A little bit of searching about how events like this impact the stock market turns up articles like this: http://www.nasdaq.com/article/5-worst-disasters-how-did-the-stock-market-react-cm68124

There's nothing in this article that persuades me that my plan of making 100% of all new purchases bonds is sensible in any way. Sigh.

[MustacheAndaHalf]

Something to keep in mind.  When Vanguard Total Stock Market ETF rises from $120.80 to $120.82, that's a new market high.  You shouldn't care that it moved so little, but if you're only thinking in terms of the highest it's been, there it is.

Another point you worth mentioning: the market has to keep hitting market highs.
That's how it gains about 7% per year over long periods of time.

[Kaspian]

Most of the perceived "instability" is purely news headlines at this point.  Electing Donald Trump didn't suddenly turn the US into a Banana Republic.

^^ This.  You're probably watching too much of the crazy box.  Marxist, anarchist thugs at Berkeley pepperspraying girls and smashing up a Starbucks isn't "political instability", it's a temper-tantrum which has very little (nothing!) to do employment numbers and GDP.  Likewise, a president's incoherent, delusional ramblings doesn't necessarily hurt an economy.

[Retire-Canada]

Trump has had some bad speed wobbles, but he hasn't actually done anything that's had a significant impact. Once legislation starts working its way through congress and we see some details about what is likely to happen the markets will react. Until then most of what he's saying would be good for the economy and the things he has said that would be bad [trade wars] are far less likely to actually happen as they'd get a shit ton of push back from people in the Government with a clue.

[Gondolin]

Most of the perceived "instability" is purely news headlines at this point.  Electing Donald Trump didn't suddenly turn the US into a Banana Republic.

^^ This.  You're probably watching too much of the crazy box

+100 Trump sending Huffpo editorialists into apoplexy with crazy tweets every day isn't political instability. It's irresponsible and dumb but, so far, just a lot of sound and fury.

[Abe]

Agree. It's only instability when he dismantles all the federal regulations he plans on dismantling and offering no workable alternatives. If he only talks about it, it's just being a blow-hard.

[ChpBstrd]

I've read a few articles about how the stock market is poorly correlated with GDP. GDP of all things! Corporate profits justify stock prices, not income inequality, unaffordable healthcare, crappy diplomacy, foreign wars, crime, or corruption in government.

Many companies would make more money in a world of monopolies, political bribery, falling wages, rising prices/margins, misallocated government priorities, or incompetent regulations!

Bottom line - what's bad for the people could be good for the stock market. You have to think with two minds rather than good/bad. Qui Bono?

That's the market's theory today, but sentiment could rapidly shift. At some point, the vandalism of success-driving systems like education, the federal reserve, checks and balances, etc. impairs the long term potential of an economy. For example, Mexico and the US started out as roughly equal twin democracies in terms of wealth and resources, but for some reason the US grew about 1% faster for a century. I personally think politics and culture are to blame.

If the US went the direction of Russia, Turkey, or Egypt  I'm not sure what the market reaction would be. As best I can tell, markets only care about next quarter's earnings... That and not losing "safe cash" held at banks or in bonds when those banks or currencies collapse and inflation rises.

Reality is complex in the long run. Even if you knew the repeal of Glass-Steagal in 1998 would eventually lead to a credit crisis, you would still have made MUCH more money staying in the market than hiding in cash for a decade.

[theolympians]

The market is high because the administration is delivering on its promises. The market is hopeful that it will continue to deliver, namely on tax cuts and deregulation.

[talltexan]

There is a debt ceiling limit coming up at the end of march. Failure to raise that ceiling could cause a short-term liquidity issue for Federal government debt (which many of us own) or mandatory payments, such as social security.

Most political observers do not expect it to be a problem (the way it was in 2011 and in 2014) because the same party is in control of all three branches of government. It was never a problem from 2001-2006.

[SeattleCPA]

I wonder a couple of things about the economy (which appears to be getting better not just in US but outside the US too).

First, the financial crisis was going to take a long time to finally truly be over according to Rogoff and Reinhart's "This Time is Different."

https://press.princeton.edu/titles/8973.html

So is what's happening now, around the world, just the last stage of the long-in-coming full recovery?

Second, if you've worked in business, you know that there's been a lot of regulatory burden added over the last decade: FATCA, ACA, Dodd-Frank... is (so far only) talk of dialing back regulatory burden positively impacting businesses and entrepreneurs?

One thing the healthy economy may show: it's really hard to predict the market.

[Burghardt]

As noted lower corporate taxes = higher after tax profits.

If companies can bring the 1 trillion overseas back to the US tax free the assumption on Wall Street is that most of the money will go towards stock buybacks.

If capital requirements are lowered for banks then they may have billions, maybe even hundreds of billions, that they can put towards stock buybacks.

2014 it was said to be 2 trillion, for 2016/17 i've found articles claiming "over 3 trillion".
That's a lot of money potentially coming back. Of course it has Wall Street leering and drooling.