{"id":9809,"date":"2019-12-20T10:00:34","date_gmt":"2019-12-20T16:00:34","guid":{"rendered":"http:\/\/blog.uwsp.edu\/cps\/?p=9809"},"modified":"2019-12-20T10:27:40","modified_gmt":"2019-12-20T16:27:40","slug":"the-economy-5-things-you-should-know-for-2020-and-beyond-part-5","status":"publish","type":"post","link":"https:\/\/blog.uwsp.edu\/cps\/2019\/12\/20\/the-economy-5-things-you-should-know-for-2020-and-beyond-part-5\/","title":{"rendered":"The Economy: 5 Things You Should Know for 2020 (and Beyond) \u2013 Part 5"},"content":{"rendered":"\n

Number\n5: Drivers of The Stock Market <\/strong><\/p>\n\n\n\n

The\nS&P 500 index is a benchmark index for measuring the performance of the\nU.S. stock market. It is a diversified index that contains the stocks of 500\nrelatively large companies (large cap) in an array of industries.  Stock prices reflect expectations<\/em> of\nfuture corporate profitability – more specifically, the earnings and cash flow\nexpected for each share of a company\u2019s stock. If earnings or the growth rate of\nearnings decrease, a company\u2019s stock price will generally decrease. If the\nstock market becomes riskier due to economic uncertainty (such as the recent financial\nand economic crisis, or tariffs), then stock prices will decrease. Recent stock\nmarket performance \u2013 up, down, and all around over the past decade, but\ngenerally up. <\/p>\n\n\n\n

Annual\nReturn of the S&P 500 Index since the Financial Crisis<\/em><\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

A\nnumber of factors have impacted the stock market to varying degrees at various\npoints in time. Listed below are (not listed in any particular order) some of\nthe more important drivers that have recently impacted stock market\nperformance.<\/p>\n\n\n\n

The Tax Cuts<\/em><\/p>\n\n\n\n

Since\nstock prices reflect expectations<\/em> of future corporate profitability, the\n2018 tax cuts arguably contributed to a strong stock market in 2017. The\ncorporate tax rate was lowered from 35% to 21% in 2018. In addition, capital\nexpenditures (spending on property, plant, and equipment) could be expensed (a\ntax deduction in the year of the expense) rather than depreciated (allocating\nthe cost and spreading the deduction over the life of the property). Both\nchanges contributed to a strong stock market in 2017 and a general expectation\nof increased corporate profitability and economic growth. Companies were awash\nin cash.<\/p>\n\n\n\n

Share\nBuybacks<\/em><\/p>\n\n\n\n

The\n2018 tax bill significantly increased corporate profitability and cash flow. If\ncompanies have excess cash after making necessary and desired expenditures,\nwhat can they do with it? One option \u2013 share buybacks. Share buybacks allow\ncompanies to increase their stock price, as the total earnings of the company\nwill be divided between fewer shares. In other words, share buybacks will have\na positive impact on earnings per share, which in turn will increase the stock\nprice.<\/p>\n\n\n\n

The\n2018 tax bill contributed significantly to a dramatic increase in share\nbuybacks. According S&P Dow Jones Indices, share buybacks hit their highest\nlevel in history in 2018. The total value of share repurchases by companies reached\na record $806.4 billion in 2018, up 55 percent from 2017. The 2018 record level\nwas more than 36 percent higher than the previous high in 2007. Despite the\nhuge increases in 2017 and 2018, share buybacks were on pace to potentially\nreach a record $1 trillion in 2019.<\/p>\n\n\n\n

Interest\nRates<\/em><\/p>\n\n\n\n

Theoretically,\nthe Federal Reserve acts in an independent manner to balance economic growth\nwith inflation. The Federal Reserve tries to\naccomplish this goal through targeting the \u201cfed funds rate\u201d \u2013 a very short-term\ninterest rate that when changed, typically has a rippling effect through the\nfinancial markets. The Federal Reserve influences this rate by primarily\ncontrolling the money supply in the United States. The amount of money\ncirculating in the economy has an impact on interest rates and credit conditions\n– more money, lower interest rates; less money, higher interest rates.  The rate is lowered when the Federal Reserve\nincreases the money supply through purchasing Treasury securities (technically\ncalled Open Market Operations).<\/p>\n\n\n\n

After 2008, in an effort to help the economy recover from the financial and economic crisis, the Federal Reserve periodically and aggressively purchased short and long-term Treasury securities (\u201cquantitative easing\u201d) in an effort to keep interest rates low. These lower interest rates contributed to the U.S. gradually and successfully recovering from the economic recession caused by the financial and economic crisis.  In a similar fashion, the fed funds rate was aggressively lowered in 2001 to help the U.S. economy recover from an economic recession, at least partially caused by the Sept. 11 terrorist attacks. From 2015 through 2018, as a result of an improving economy and at least some expectation of an increased risk of inflation, the Federal Reserve increased interest rates several times. Things reversed in 2019. Growing concern over a global economic slowdown and the negative impact of tariffs on the U.S. prompted the Federal Reserve to cut interest rates three times as of November 1, 2019 (something that was encouraged by the Trump Administration). The result has been a decline in short-term and long-term interest rates in the financial markets. <\/p>\n\n\n\n

The\nchart below shows the Treasury yield curve on November 1, 2019 relative to one\nyear ago. The Treasury yield curve shows the relationship\nbetween short-term and long-term interest rates. Across the board, all rates declined\nrelative to one year ago. Lower rates encourage borrowing and spending \u2013\nfactors contributing to economic growth and the strong stock market in 2019.\nHowever, given the current level of extremely low rates, it may be difficult\nfor any further reduction of interest rates to have a significant, positive\nfactor on either economic growth or the stock market.  <\/p>\n\n\n\n

Treasury Yield Curve Rates<\/strong><\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

Tariffs<\/em><\/p>\n\n\n\n

Tariffs\nare paid by an importing company (NOT a country) and reduce corporate\nprofitability and cash flows. In 2018 the United States had placed tariffs on\ngoods from several countries, including Canada, Mexico, India, South Korea, the\nEuropean Union, and China. Tariffs were placed on imported goods such as\naluminum, steel, consumer goods, and industrial products. Retaliatory tariffs\nwere often implemented by these countries on goods imported from the United\nStates. These goods included agricultural products, whiskey, and motorcycles. Tariffs\narguably dominated the declining stock market performance in 2018. According to\nthe Peterson Institute for\nInternational Economics, by September 2018 the United States had tariffs\non 12 percent of its total imports, while the combined trading partner\nretaliation covered 8 percent of total US exports. The tariffs, and the\nprospect of future additional tariffs contributed to a declining stock market,\nas the impact of tariffs on corporate profits created market uncertainty. <\/p>\n\n\n\n

In\n2019 the financial markets reflected a growing optimism and expectation that\nthe trade wars would at least subside, particularly with China. This optimism,\ncombined with lower interest rates, continued economic growth, and share\nbuybacks, powered the stock market through November.<\/p>\n\n\n\n

For further information:<\/p>\n\n\n\n

  1. From Morningstar, info on S&P 500 performance and the financial markets<\/a><\/li>
  2. From S&P Global, info on share buybacks<\/a><\/li>
  3. From the Federal Reserve, a history of the fed funds rate<\/a><\/li>
  4. From the Peterson Institute for Economics, a timeline on the U.S. trade war<\/a><\/li><\/ol>\n\n\n\n

    CBEI Blog Series: <\/strong><\/em>The Economy: 5 Things You Should Know for 2020 (and Beyond)<\/em><\/strong>
    Part 1: Economic Growth and Unemployment \u2013 Positive Trends for a Long Time<\/a>
    Part 2: What\u2019s Been Driving Economic Growth<\/a>
    Part 3: The Timing of Those Tax Cuts<\/a>
    Part 4: The Yet to be Paid Increasing Costs of the Federal Deficit and Debt<\/a>
    Part 5: Drivers of The Stock Market <\/a>
    Part 6: Summary and Future Challenges<\/p><\/blockquote>\n\n\n\n

    \"Kevin<\/figure>
    \n

    Kevin Bahr is a professor emeritus of finance and chief analyst of the Center for Business and Economic Insight<\/a> in the Sentry School of Business and Economics at the University of Wisconsin-Stevens Point. <\/p>\n<\/div><\/div>\n","protected":false},"excerpt":{"rendered":"

    Number 5: Drivers of The Stock Market The S&P 500 index is a benchmark index for measuring the performance of the U.S. stock market. It is a diversified index that contains the stocks of 500 relatively large companies (large cap) in an array of industries.  Stock prices reflect expectations of future corporate profitability – more […]<\/p>\n","protected":false},"author":136,"featured_media":9757,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[527],"tags":[124,343,344],"_links":{"self":[{"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/posts\/9809"}],"collection":[{"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/users\/136"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/comments?post=9809"}],"version-history":[{"count":4,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/posts\/9809\/revisions"}],"predecessor-version":[{"id":9837,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/posts\/9809\/revisions\/9837"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/media\/9757"}],"wp:attachment":[{"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/media?parent=9809"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/categories?post=9809"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/tags?post=9809"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}