Since Donald J. Trump won the presidency on November 8th, there has been a “Trump Bump” in the stock market. The S&P 500 is up 9.22%; the NASDAQ is up 11.61%. The market expects a favorable return with the Trump presidency, but this rise in prices is not a recognition of a rise in Gross Domestic Product (GDP), or an indicator of the overall health of the economy. To understand why the stocks are rising, we have to understand how they are priced and the policies that Trump is promoting.
To simplify, stocks are priced based on expected cash flows. The larger the cash flow going to the stockholder, the higher the price will rise. Initially, many consider a rise in the company value as a part of this, but it is also the expected dividends and repurchases of stock. When shares of stock are repurchased by the company, there are less shares in the market, raising the value of each individual stock. The value of the company is also based on expected cash flows, but this only reflects the stock price is the company has no debt, pays no dividends, and repurchases no stock. The best way for a company to increase the value of the company, and usually burgeon the stock price, is to increase revenues from its product, or shifting its model.
Secondly, Trump wants to lower the corporate tax rate from 35% to 15%. That alone is auspicious for businesses, and stockholders. There will be significantly more cash in publicly traded companies. But as The Intercept reported, corporations expect to use this extra cash to repurchase stocks, and to give larger dividends, raising the price of the stock. This would hand the cash back to the population who can afford to invest. This will occur because the underlying demand in the economy is not changing. Corporations will not increase their production, leading to lower their prices due to insufficient demand. With the attacks on labor that are surely to come from the GOP majority Congress and the greater Trump administration, consumer demand will likely decrease as common people will have less financial resources, due to the undermining of collective bargaining and diminished labor standards.
This phenomena is a theme of the Trump administration. It is a misrepresentation of cause and effect. It is taking credit for the economy that has improved and flourished since May 2010. Trump’s policies are putting capital back in the hands of those who already have it, while relieving the lower and middle classes of nothing. Only 52% of Americans own stocks, down from 65% in 2007, with a higher concentration of ownership at the upper end of the income spectrum. Those who can not afford to enter the market, including many white working class workers, are excluded from economic gains again.