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You are here: Home / Uncategorized / Business News: Why the Stock Market Keeps Going Up, Up, Up

Business News: Why the Stock Market Keeps Going Up, Up, Up

June 24, 2017 by tbreport Leave a Comment

by Charles Gasparino
All news is good news, apparently — at least if you judge by the stock market.

US economic growth is sluggish, consumer confidence is down and President Trump’s tax reform is stalled. And yet, the market isn’t spooked — it has climbed to historic highs.

The question is why.

After all, the warning signs aren’t imaginary. The slow uphill trudge of Trump’s health-care reform is holding up his tax cuts because his aides say he needs health-care budget savings to finance them.

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Many investors I speak to are particularly obsessed with slashing the corporate-tax rate from its current level of 35 percent — one of the highest in the world — to around 15 percent or 20 percent because it would boost earnings and thus lift stock prices. If that doesn’t materialize, and more global unrest does, stocks could finally take the pounding they’ve avoided so far.

There’s also the fact that the rally, particularly in recent months, has been pretty narrow; big names like Apple, Amazon and Facebook are powering much of the S&P index gains. That means many stocks are actually lower or treading water but the overall market performance is being carried by a few heavy hitters.

Then there’s the bond market. Bonds do better when the economy stalls and inflation remains in check, yet they have been rising, too.

But the markets’ exuberance isn’t so irrational. The Dow has been down in recent days, but many investors who are still bullish are betting that congressional Republicans will need to pass something to goose the economy before the 2018 midterm elections — and that “something” is still likely to be tax reform with deep rate cuts for the corporate world.

Trump may not be an ardent supply-sider, but he constantly talks to his aides about spurring economic growth through lower taxes, I am told. He understands, as I wrote in these pages in December, that the lesson from Bill Clinton’s scandal-plagued second term is that a strong economy will quiet the critics.

My sources on Capitol Hill also tell me the recent frenzy among the House and Senate leadership to pass health care and cobble together a tax-cut plan shows they recognize their backs — not just Trump’s — are against the wall.

Meanwhile, the aspects of Trump’s fiscal agenda for which he doesn’t need congressional action are reaping dividends. His executive orders limiting regulations on businesses haven’t gotten the exposure they should, but the savings are real; with President Barack Obama you had a chief executive always looking to pile more mandates on businesses (or through his attorney general, put bankers in jail).

In contrast, the Trump administration is united on the need to cut some of the red tape Obama saddled businesses with. In plenty of cases this is even more important to executives than cutting taxes because of the skyrocketing compliance costs. Indeed, according to a report last year from the Competitive Enterprise Institute, red tape’s price tag is $1.885 trillion, while the federal income tax burden (both individual and corporate) amounted to $1.82 trillion.

Good and bad news about Trump's massive tax plan

Anything that puts more people to work generally means more tax revenue and smaller deficits in the long run, which are net positives for stocks since government bond sales don’t crowd out other investments.

And here’s one factor seemingly out of everyone’s control: There are just fewer stocks to invest in these days thanks to a decline in IPOs and mergers. One of the untold stories of the current bull market is the dearth of the supply of stocks and the amount of money — much of it on autopilot from pension funds and mutual funds — that flows into the market every day.

In 1996, for example, there were about 8,000 stocks listed on major exchanges; today that number has shrunk to around 4,000, thus putting a natural floor on any correction as funds keep looking for stocks to invest in.

It’s often dangerous to make bold predictions about the markets going up; plenty of smart guys looked dumb predicting Dow 30,000 during the various bubbles over the past two decades. But here we are today, closer to Dow 30,000 than anyone would have predicted during the dark days following the 2008 financial collapse.

In other words, maybe it’s wise to look on the bright side.

Charles Gasparino is a Fox Business senior correspondent.

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