Having failed to convince Jerome Powell of the merits behind cutting rates into deeply negative territory, and finding little support for the idea of asking the Fed to commandeer the tape on days when the screens aren’t green, Donald Trump is going to try something else to propel the Dow into his second term target range of 100,000 to 500,000.
“The White House is considering ways to incentivize US households to invest in the stock market”, CNBC’s Kayla Tausche reported late Friday, with a little over an hour to go before the closing bell sounded ahead of a long weekend for US traders.
Apparently, the scheme involves a plan to let households earmark a portion of their income for investing in stocks outside of a traditional 401(k). That portion of household income would be tax-free.
Anecdotally, stock ownership among American households has yet to return to pre-crisis levels. CNBC uses a Gallup poll that asks Americans to self-report participation in the equity market.
“Stock ownership was more common from 2001 to 2008 when an average 62% of US adults said they own stock, but this fell toward the end of the 2007-2009 recession and has not fully rebounded”, Lydia Saad wrote last year, describing the following simple visual.
It’s also well-known that despite 2019’s massive equity market gains, bond funds were the money magnet, attracting huge inflows, while stock funds (in aggregate) lagged in terms of taking in new cash.
However, more nuanced approaches to measuring exposure to stocks suggest allocations are, in fact, elevated.
For example, in a note out last month, JPMorgan said a retail investor positioning proxy “stands at record high levels for funds domiciled worldwide and very close to record high levels for funds domiciled in the US”.
That metric does not capture stocks held directly (i.e., it measures equities held in funds). So, JPMorgan also used the Flow of Funds report to measure the stock allocation of US households.
That approach has its own problems. Most notably, it captures institutional money, hedge funds and some private equity – hardly “households”. But when considered in conjunction with the above, the two provide a useful snapshot. Here’s the bank’s Nikolaos Panigirtzoglou:
The last observation available is for Q3 2019. But our extrapolation based on equity and bond returns up until January 16th shown by the dot in Figure 5, suggests that US households are starting 2020 at a new cycle high in terms of their equity allocation. Their current equity allocation represents their most overweight equity position since the end of 2000, albeit some way from the historical peak of Q1 2000.
The upshot of that analysis is that retail investors are too long to get any longer without stretching their allocation to historic extremes.
Even if that’s the case, Donald Trump is a man who loves the idea of “historic extremes”. In fact, one of the president’s favorite pastimes is trafficking in superlatives about his accomplishments relative to history.
Earlier, I noted that Larry Kudlow spent Friday talking up another round of tax cuts. Apparently, this new idea to incentivize stock ownership would be part of the same economic stimulus package.
“Under one scenario, a household earning up to $200,000 could invest $10,000 on a tax-free basis, although officials noted these numbers are fluid”, CNBC’s Tausche writes.
Apparently unable to rouse anyone credible late on a Friday afternoon, Tausche was forced to turn to Stephen Moore for comment. Not surprisingly, he loves the idea.
“[The plan] would represent a pretty substantial amount of money for people”, Moore mused, adding that this is “the type of thing that would expand ownership”.
Moore – who is not an economist and doesn’t even do a good job playing one on television – is also a supporter of a plan to index capital gains to inflation, a possibly illegal move (if not done with congressional permission) that would amount to a $100 billion handout to the wealthy, according to an analysis by Wharton.
“STOCK MARKET AT ALL-TIME HIGH!”, the president shrieked into the digital void last month, as US equities summited fresh peaks in a relief rally catalyzed by the abatement of tensions with Iran. He continued:
HOW ARE YOUR 409K’S DOING? 70%, 80%, 90% up? Only 50% up! What are you doing wrong?
It would have been an absurd tweet on its own without Trump conjuring a new class of retirement savings account. The president was immediately lampooned by millions of Twitter users. “My 409k” became a trending topic.
The president has, of course, reveled in the stock market’s performance since his election, and he leverages the fear of a collapse to marshal support for his 2020 campaign.
“If for some reason [I don’t win] the 2020 election, you’ll see this economy go down the tubes”, he warned in August, when the economy looked like it was, in fact, going “down the tubes” thanks to the trade war.
“You have no choice but to vote for me because your 401(k)s — down the tubes”, he continued, at a rally. “Everything’s gonna be down the tubes”.
Trump, more than any other president, views the Dow as something of a real-time job approval barometer and whenever stocks hit record highs, he starts asking “How’s your 401(k) doing?” at rallies and fundraisers.
The sad reality is that a good portion of Trump’s base likely doesn’t participate in a 401(k) or own any stocks at all, for that matter.
He’ll claim tax breaks aimed at incentivizing stock ownership are a way to help level the playing field, but in reality, any such plan will almost surely exacerbate the situation, unless it’s carefully tailored to avoid allowing the rich to hoard an even larger percentage of financial assets, this time tax-free.
Of course, this new idea of Trump’s has no hope of passing Congress prior to the election, something one official who spoke to Tausche readily admitted.
“It’s sort of an idealistic document”, the person said. “If you reelect this administration, this is what you’re going to get”.
In other words, it’s a quid pro quo.