The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Tax Support

11/22/2017

The S&P 500 has set 54 new all-time highs so far this year.  Most believe the elevated level of the stock market is due to the flooding of cash into the economy by the Fed since 2009.  That was an important factor but is decreasingly so, as the Fed reduces its balance sheet by selling off some of its bonds and raising interest rates..

More importantly, the stock market reflects higher corporate earnings, and those earnings are expected to continue increasing next year.  But, there is something else supporting the stock values right now.

A price normally reflects the supply and demand for that product.  If demand increases, buyers will bid up the price.  If supply increases, sellers will have to lower their price to sell their products.  The same is true for stocks.  If more people want a particular stock, it will rise in value.  If fewer people want that stock, it will fall in value.

Right now, there is a shortage of sellers in the stock market.  One reason is that sellers think prices will continue to rise.  Another reason is that they think their capital gains will be taxed at a lower rate next year.  Why sell it today and pay a 20% capital gains tax, when you can ride the increasing value and sell it in January, paying only a 15% tax?

The combination of higher expected corporate earnings next year and the reluctance of sellers to sell this year are both contributing to the 54 new all-time record highs.  If the stock market gets scary in January, don’t be surprised . . . nor frightened.  

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