I would not have worried too much of a Dow correction, but I feel like a trifecta of events are coming together that is a bit concerning. First, is the explosion of US government deficit which could potentially lead to austerity measures in the near future. Second is the threat of inflation and overheating. And third is the plunging savings rate of individuals. It almost appears that these three are moving to a confluence. Austerity + rise in interest rates + depleted savings could lead to a consumer spending crash in the near future.
Dow plunges 1000 points
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Re: Dow plunges 1000 points
#222The dollar has weakened over the past year, so knock off 1/4 point off any quarterly GDP numbers proposed, and knock 10 points off the 23% the 401(k) supposedly got in the past year, and consider any inflation comes with assymetric timing risk where wages always lag by a lot. And now in real terms the past year's stock increases look a lot more ordinary rather than remarkable. It's not like the stock market is going to ignore a weakening dollar, in particular when the Treasury Secretary publicly says it's a good thing as if it's an actual policy to have a weak dollar.
And working people have to feel the sting of inflation before they demand wage increases, they don't just automatically happen. Before that, interest rates going up might increase housing sales as people want to get "in" before the interest rates go up even more, and then housing will slowly taper off as inflation and interest rates take hold, and people get priced out of buying, since their wages will not keep up in the short term.
Inflation also helps pump up tax revenue, and monetize debts. So the numbers will look better, but in real terms they won't be better for a while until the markets fully correct for inflation and then things stabilize a bit.
Re: Dow plunges 1000 points
#223Earlier quoted context omitted.
Didn't the top income tax rate decrease by something like 2.5%? Doesn't seem like a lot of room for it to have decreased but still be "significantly higher" than it ended up at.
The top rate before was 39.6% for over 480k, over 480k now hits the 35% and 37% mark and that is a HUGE difference. Let's only consider how that effects the top 1% and a rough estimate. Currently that's around 1.73M filers with an average income of 1.4M a year. Under the new tax rules the average 1% will save $40,000 over 480k (will obviously save more under 480k but not counting that). That totals out to be $692B in…
Your math is off by one magnitude. $40k * 1.73 million people = $69.2 billion. Unless I'm missing something?
Re: Dow plunges 1000 points
#224To put things in perspective: https://en.wikipedia.org/wiki/List_of_largest_daily_changes_... Saying "Biggest Point Drop in History" is a deliberate attention-grabber and incites more fear than it probably should. We should be more concerned with percentage changes and at -4.6% this doesn't even make the top 20 daily percentage drops, which cuts off at -6.98% for number 20 (see above link).
It looks like it might be in the top 100 though. Considering these are changes per day , and the chart covers around 100 years or 25,000 trading days, this puts it in the top 0.4% of largest percentage daily losses. So, it does appear to be a significant losing day if 99.6% of such days are smaller in magnitude.
About 0.3% of days are my birthday.
Re: Dow plunges 1000 points
#225Earlier quoted context omitted.
The top rate before was 39.6% for over 480k, over 480k now hits the 35% and 37% mark and that is a HUGE difference. Let's only consider how that effects the top 1% and a rough estimate. Currently that's around 1.73M filers with an average income of 1.4M a year. Under the new tax rules the average 1% will save $40,000 over 480k (will obviously save more under 480k but not counting that). That totals out to be $692B in…
> In other words 70% of the deficit over the decade is coming from cuts from the top 1%. I believe it's far more accurate to say that 70% of the tax cut-related deficit is coming from tax cuts to the 1%. The impact on the overall deficit is far less than 70% from those cuts.
Thanks, edited. I can see how that was confusing
Re: Dow plunges 1000 points
#226Earlier quoted context omitted.
Another way of thinking about it is: on average, stock value over the long term (20+ years) is very likely to be in range of, say, 5%/year, plus or minus (actual number is not that important for our purpose here), after adjusting for inflation. If stocks have been on a recent runup, gaining, say, 50% or 100% over a period of a few years, then they are very likely to grow more slowly than average (i.e., revert to the…
>> If stocks have been on a recent runup, gaining, say, 50% or 100% over a period of a few years, then they are very likely to grow more slowly than average (i.e., revert to the mean) over the coming years This is incorrect. Prior performance of the market over the span of years has little to no predictive power on future performance of the market. Your statement is like saying: Because I flipped a coin and got heads…
Stock prices aren't the outcome of lotto balls or coin flips. In theory, over the long-run, the price of shares will represent an equilibrium of investors' opinions of the intrinsic value of a company (divided by the number of shares). The intrinsic value is commonly modeled as the net present value of future cash flows plus a discounted terminal enterprise value.
For the same inputs (sequence of future cash flows, enterprise value, and weighted average cost of capital [discount rate]), the long-run value will be the same. If the near-term share price value rises more quickly than the long-run intrinsic value model, it is entirely reasonable to assume future growth of share price will moderate, as it must in order to converge on the same long-run value.
I think it's not at all like your example with 10 coin flips in a row.
Re: Dow plunges 1000 points
#227Earlier quoted context omitted.
Another way of thinking about it is: on average, stock value over the long term (20+ years) is very likely to be in range of, say, 5%/year, plus or minus (actual number is not that important for our purpose here), after adjusting for inflation. If stocks have been on a recent runup, gaining, say, 50% or 100% over a period of a few years, then they are very likely to grow more slowly than average (i.e., revert to the…
>> If stocks have been on a recent runup, gaining, say, 50% or 100% over a period of a few years, then they are very likely to grow more slowly than average (i.e., revert to the mean) over the coming years This is incorrect. Prior performance of the market over the span of years has little to no predictive power on future performance of the market. Your statement is like saying: Because I flipped a coin and got heads…
Absolutely not true. Days of stock market movement aren't independent events, they're loosely coupled together and with the economy overall. Your comment is a good example of, "Knowing just enough to get into trouble."
Re: Dow plunges 1000 points
#228Earlier quoted context omitted.
Um... by reducing spending.
The current admin has proposed a multi billion dollar wall (turns out we will pay for that after all), a trillion dollar infrastructure project, and increases in military spending. What is this "reduced spending" you're talking about?
It seems pretty straightforward: they likely aren't in favor of those policies either.
Re: Dow plunges 1000 points
#229Earlier quoted context omitted.
>> If stocks have been on a recent runup, gaining, say, 50% or 100% over a period of a few years, then they are very likely to grow more slowly than average (i.e., revert to the mean) over the coming years This is incorrect. Prior performance of the market over the span of years has little to no predictive power on future performance of the market. Your statement is like saying: Because I flipped a coin and got heads…
Stock prices aren't the outcome of lotto balls or coin flips. In theory, over the long-run, the price of shares will represent an equilibrium of investors' opinions of the intrinsic value of a company (divided by the number of shares). The intrinsic value is commonly modeled as the net present value of future cash flows plus a discounted terminal enterprise value. For the same inputs (sequence of future cash flows, e…
There's some truth to the 'random variable' theory.
I think we only value stocks the way described (intrinsic value model) because its a cultural myth to do so. We can also think of stock certificates as baseball cards - of value mostly to other collectors. Sure there's a 'book value' or 'dividend value' behind them, but that's irrelevant most of the time for most stocks.
Re: Dow plunges 1000 points
#230Earlier quoted context omitted.
It's a great question, because point drops are not a very useful metric.
Yeah i expect this record to be shattered multiple times in my lifetime.
I hope [this point record] is shattered many times.
Otherwise, I've died young or the market hasn't grown much over my remaining ~40 years of life...