The stock market is a calloused world. It doesn’t care about your politics. It doesn’t care about your religion. It doesn’t give you an A for effort or a participation trophy. It deals in cold, hard, reality. Returns have one mode of speaking – the truth.
Everyone who has ever lost money on the stock market, whether it’s a financial advisor, or a hedge fund manager, or a kid in his parent’s basement, has an endless list of excuses as to why their investment didn’t work. But the market doesn’t care. It simply says that the investment was a bad idea and moves on.
Right now, the market doesn’t care about who’s in power. It’s undergoing a severe correction. The TSX has lost 10% of its value. The DOW dropped over 2,000 points (that would be the entire stock market during the 1980s). The Hedge Fund industry saw September as its most massive out-migration in the history of the business.
Why is this happening?
The answer isn’t that the world is falling apart. This is a much-needed correction. The stock market was booming after Trump became elected. It didn’t care that immigrants felt left out. His corporate tax cut gave a boost to company profits and with the stroke of a pen made the U.S. one of the most competitive jurisdictions to do business again.
Another issue is Trump’s deficit spending. Democrats went strangely silent when Obama started wars. Republicans went strangely silent when Trump offered deficits during a period of economic growth. Investors, however, are less worried. It isn’t that deficit spending doesn’t concern us, it does. It’s more that the average horizon for an investor is a three-year timeframe and these deficits are paid back over a longer period of time. As a result, a short-term boost in the economy causes greater investor confidence and the stock market rises further.
The crux of this is investor confidence. The price of a stock is determined by one thing: the intersection of supply and demand. If investors are confident in the market, they want to buy, and demand goes up, causing stock prices to rise. The fundamentals of these companies didn’t change, aside from the tax break, this unprecedented stock climb was based on psychology.
What’s reversed the trend is rising interest rates. Low-interest rates mean more spending. Mortgages rates are at an all-time low, meaning more people qualify for home ownership, which is good for the builders, the realtors, the lawyers, the brokers, the banks. All-time lows on car loans mean more people qualify to purchase a vehicle, which is good for the mechanic, the salesperson, the banks, the manufacturers, and the steelworkers. All-time lows of business loans mean that more businesses can be started than ever before. Low-interest rates mean cash-flow, which boosts the economy.
However, this causes inflation. To curb inflation, central banks raise interest rates, which means less spending, which means business profits go down. This diminishes investor confidence. The markets are going down because of a much-needed correction.
Trump’s great presidential success is the economic boom, symbolized by the market explosion. The stock market correcting this is a major diminishing of his chief accomplishment. When Trump discusses auditing the FED, he isn’t doing so out of having been visited by the ghosts of three Austrian economists and has had a change of heart, it’s because they’re raising interest rates reversing his chief success. He’s not the hero of our movement, he’s being the same petulant child he has always been, predictably going after anyone that opposes him.
I like buying stocks. I like even more buying them when they are reasonably priced not overpriced. This isn’t a cause for concern for investors, it’s a cause for celebration. Stocks are returning to acceptable valuations. The past few months have been grim, but this is the core of our beliefs as libertarians. When prices drop this attracts investment for stability. This is a great time for the liberty movement.