Trump and the Stock Market

What is "the stock market"? Simply, it's the aggregate of all of the buying and selling of stocks. A stock is basically a partial ownership, or at least a financial stake, in a given company. The price of a stock, while influenced by how profitable a company is, can also be influenced by outside events that have nothing to do with the actual running of a company. The main determinant of a company's stock price is supply and demand. High demand for any stock will cause the price to rise while low demand will push the price down, just like a physical commodity. One of the factors that contributes to increased demand for a stock is the perception that things will get better: ideally that the company will become more profitable and the future price of the stock will increase when the buyer decides to become the seller. Some consider it gambling!

Some of the reasons that investors are optimistic can be attributed to President Trump; one is his antipathy to regulations that, in his estimation, cost companies money. Another is the tax bill that was just passed, which was extremely favorable to large corporations, at the expense of middle income Americans. Investors are betting that these changes will result in more profits which will in turn spur more demand and therefore higher resale prices down the road. The other side of the story is that the stock market has been rising steadily since 2008, so a portion of this increase in stock valuation can be attributed to an eight-year, now nine-year, upward trend. In fact first year percentage increase was greater under President Obama, despite the fireworks of record after record.

But what exactly is "up", when we say "the stock market" is up? The Dow Industrial average is a weighted average on 30 stocks. Yes, just 30. And as I mentioned, it's a weighted average. Weighted by what? Price. Stocks that are higher priced are weighted more heavily than lower priced stocks, which skews the average. For example, Boeing's stock, the most expensive, increased by 50%, contributing to 25% of the increase in the Dow average. As you can see from the chart, four companies contributed to 60% of the increase!

Another thing to consider is that the increased stock valuation of the Dow, or even of just individual stocks, is just paper profits. If you hold a stock certificate you don't actually have any money in the bank. You may have 100 shares of stock worth $1000 each, but all that means is that if someone buys that stock from you for $100,000, you have $100,000. It is entirely possible that some event will cause the stock valuation to plummet and your stock will be worth nothing. Even assuming that the value goes up, you're just moving money around. You're often not even contributing operating capital to the underlying company unless it's an initial public offering. Wealth isn't really being created, it's just being moved around.

So, while a rising "stock market" isn't necessarily a bad thing, it doesn't actually tell us as much as some people think it is.