In a Wall Street Journal op-ed, Red Jahncke argues that the recent drop in U.S. stock markets may be a delayed response to a tax change:
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In late 2012, investors sold huge amounts of investments with long-term capital gains to take advantage of the expiring 15% “Bush” long-term capital-gains tax rate before the current 23.8% rate for higher-income investors took effect on Jan. 1, 2013. These sales left investors with few unrealized long-term gains going into 2013.
Instead, as the market surged, investors’ new gains were held mostly in short-term positions, which they were loath to sell given that short-term gains are taxed at ordinary income-tax rates (39.6% for high earners). With this inhibition there was less sales pressure last year, and for that reason the market may have risen more than it would have otherwise. Indeed, last year’s 30% market gain exceeded most analysts’ predictions.
U.S. stock markets* are flirting with all-time highs (it may happen today) but I am hearing and reading very little about it. Why is that?
I can think of a few possible reasons, and am eager to hear yours.
1. After the spectacular meltdown of 2007-2009, a lot of people are generally gun-shy and/or inattentive.
2. Since so many people sold into the teeth of the meltdown, and stayed on the sidelines since, a new high is to them relatively bad news.
3. Because the economy itself is not quite roaring, a roaring stock market doesn’t seem legit (unless, of course, you consider it a leading indicator, which it usually is).
4. Just “getting back” to an all-time high from more than five years ago is, at best, a muted victory.
All that said, I remain surprised by the lack of chatter.
From a new working paper by David Yermack, an economist at NYU/Stern, called “Tailspotting: How Disclosure, Stock Prices and Volatility Change When CEOs Fly to Their Vacation Homes” (abstract; older version in PDF):
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This paper shows close connections between CEOs’ vacation schedules and corporate news disclosures. I identify vacations by merging corporate jet flight histories with real estate records of CEOs’ property owned near leisure destinations. Companies disclose favorable news just before CEOs leave for vacation and delay subsequent announcements until CEOs return, releasing news at an unusually high rate on the CEO’s first day back. When CEOs are away, companies announce less news than usual and stock prices exhibit sharply lower volatility. Volatility increases immediately when CEOs return to work.
Maybe my computer thinks I am in China (but I am not; I am in New York).
Maybe a Chinese hacker is just having a laugh (it has happened before).
Maybe the Chinese have bought all of our stock markets (although I seriously doubt it).
Three years ago today, the S&P 500 closed at 676.53.
Today, it opened at 1366.50.
As Businessweek asks: where’s the party for this bull market?
The article, by Whitney Kisling, is interesting throughout, exposing the massive pessimism still attached to the markets despite this steep recovery. It is well worth a read for anyone who believes (or wants to believe) that behavioral economics has a lot to teach us about real-world investing behavior. Read More »
Note that Farmer doesn’t argue that the crash “contributed to” the recession, or “was a leading indicator” of the recession — but, rather, that the crash “caused” the recession. It’s worth acknowledging that a) Farmer attributes the housing-market crash as the direct trigger of the stock-market crash; and that b) he does this in service of the larger question: how to beat back unemployment.
From the abstract:
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This paper argues that the stock market crash of 2008, triggered by a collapse in house prices, caused the Great Recession. The paper has three parts. First, it provides evidence of a high correlation between the value of the stock market and the unemployment rate in U.S. data since 1929. Second, it compares a new model of the economy developed in recent papers and books by Farmer, with a classical model and with a textbook Keynesian approach. Third, it provides evidence that fiscal stimulus will not permanently restore full employment. In Farmer’s model, as in the Keynesian model, employment is demand determined. But aggregate demand depends on wealth, not on income.
A recent study in the Journal of Finance by Zhi Da and Paul Gao of the University of Notre Dame shows that data from public Google searches can be used to beat the stock market by up to ten percentage points per year. Similar findings were released last month by researchers at the University of Kansas.
The Notre Dame authors argue that the frequency of Google searches received by a stock (its SVI number) is a better, more direct method of measuring investor attention (a precursor to buying the stock) than traditional, indirect methods of measurement, such as news and advertising expense. Read More »