As I write this during the first week of 2018, the stock market is continuing its upward trend and making new highs.  (Maybe by the time this is actually posted we will have a correction, but bear with me.)  Many are touting the recently-passed tax package as the reason for the continued upward trend.  The Man Himself, President DJT, credits himself.  Would you expect anything else?  He had better watch out – there will be a correction at some point in the next 3 years.

While the tax package and Republican/Trump policies likely play a part in the explanation of the market uptrend, they are not the only reason.  When it comes to the US and global economic ecosystems, cause and effect are very complicated.  Imagine the biggest supertanker in the world, many times larger than one that already exists.  That is the economy.  That super supertanker cannot be maneuvered easily.  Once it starts on a path, that’s where it is going to go.  Tweaks such as the US corporate tax cut, significant though it is, must work in concert with additional tweaks in order to have a real effect.

Symphony

What other factors out there are working in concert with the corporate tax cut, such that they are starting to make music together?  I have outlined some in previous posts, but let’s review:

• Low Interest Rates:  Although the US Fed has been raising rates over the past 2 years – up about 1% during that time – the European Central Bank (ECB) has not, and there are still negative interest rates in Europe.  Worldwide rates remain low.  Low rates allow companies (and governments) to borrow at lower costs.  Good for the economy.
• Low Inflation:  Rates are low because inflation is low.  Economics 101 says that inflation is caused by too much money chasing too few goods.  Demand outstrips supply.  Well, inflation is low because there are not “too few goods”.  There is a surfeit, not a shortage.
• Emerging Economies:  There is a surfeit because of emerging economies and global trade.  Products are made in Asian and African countries using minuscule labor rates and shipped to larger markets like the US and Europe.  There seems to be no shortage of people worldwide willing to work for little pay.
• Low Oil Prices:  While oil has recently moved up to $60 or more per barrel, it is still lower than the $100 or more we had to deal with a couple of years ago.  Oil (and energy prices in general) remain relatively low because of our old friends, Supply, and Demand.   Supply is high because of technological advances such as fracking, and demand, while not low, has not increased as it has during previous economic upturns because technology-fueled upturn is not as energy-dependent as other upturns, such as the Industrial Revolution and war-related upturns.
• TINA:  There is no alternative.  Investors remain invested in stocks because they want the level of returns that stocks have provided in the past and they are willing to go farther out on the risk spectrum to get that return.

Obama Policies

I am a Republican, but I believe President Obama’s and Democratic policies have also contributed to the current upturn in stocks, although I don’t believe they were intending to stoke the markets.  President Obama’s two terms were marked by increased regulation and government oversight.  The Dodd-Frank bill which was meant to “fix” problems which caused the Economic Crisis of 2008 is the hallmark of these regulations.  This increased regulation has been a disincentive for companies to go public, and for the smaller public companies to merge with larger public companies or even to go private again.  Current “unicorns” such as Uber and Airbnb are not public yet (though they may become public in the relatively near future) because they haven’t yet wanted to deal with the hassle of being public.  According to an article published by Harvard Law School, US public companies peaked during the dot-com bubble (early 2000’s) at over 8,000, and are now at about 4,200.  Moreover, the companies that remain public are much larger.  The larger scale is needed because of the higher cost of doing business through higher regulation and compliance requirements.  As I stated above, TINA is a factor, and so what you have is investors have more and more money that they are putting into fewer companies.  The stock prices of these remaining public companies are going up as a result.  Here is the link to the Harvard Law School article:

Looking Behind the Declining Number of Public Companies

IMO

All of these and many more factors are currently working together and the stock market has been going up as a result.  There may be a catalyst out there that will cause the macro uptrend to reverse, and there certainly will be bumps along the road.  However, it would have to be a really big negative catalyst.  I’m not going to speculate on what that might be.  For the near future, I remain long the stock market and I think you should be as well.