Why is the stock market so high? I get asked this riddle every day.
The standard answers we hear these days is that the market is anticipating another $2 trillion Trump-Pelosi stimulus bill, either before or right after the election, and investors are craving another drink from the federal fire hose. Deficit spending has apparently become crack cocaine for investors.
Economists at the Federal Reserve, UBS, Bank of America, and Goldman Sachs also tell us that a Biden administration would be bullish for the markets because he will deluge the economy with more deficit spending in the trillions of dollars. UBS even says that a clean sweep by the Democrats would be “moderately bullish” for stocks. And people actually pay economists for such lamebrained analysis. The historical evidence shows the market does the best with divided control of Washington and the worst when Democrats run everything.
More important, government spending stimulus bills have never worked anywhere, anytime, and the increased government spending in the end only crowds out private spending, investment, and profits. Just look at the Obama years and the anemic growth rates for four years of “stimulus.”
The unavoidable truth is that debts must be paid for either now or with interest later, and the taxes to pay for the spending will assuredly punish investors — and hard. For example, a major feature of Joe Biden’s tax plan is to raise the corporate income tax from 21% to 28% and to raise the capital gains tax from roughly 24% to 40%.
These are direct taxes on stock ownership. If the government takes a larger share of corporate profits, then, by definition, the shareholders get a smaller share. This should get capitalized into the value of shares of stock. Under the current tax code, a shareholder has an after-tax rate of return of about 60% on the stock, with the other 40% going to government taxes. Under the Biden tax plan, the after-tax rate of return on the stock falls to about 48% for the shareholder, with 52% snatched away by the government.
Someone please explain to me how this scheme raises stock values.
To be honest, I don’t have a good explanation for why the market has been so dizzyingly high, except for the fact that the economy is doing much better than anyone expected during the pandemic.
But here is another explanation. Perhaps the market’s collective wisdom knows something about this crazy election that pollsters and political pundits aren’t seeing. Maybe the market is making a bet that President Trump will defy the odds and win. Right now, the betting odds have him at 40%.
Don’t forget, the unexpected Trump win four years ago caused a massive market rally hours after he was declared the winner — a rally that lasted three years. Maybe investors don’t want to be caught surprised a second time. The only sure bet is that if Trump loses and Democrats sweep, the rally in the stock market and the real economy will come to a screeching halt.
Stephen Moore is an economist at FreedomWorks and a member of President Trump’s economic recovery task force. He is the co-author of Trumponomics: Inside the America First Plan to Revive Our Economy.
