Stock markets of the United States have been very volatile of recent. The reason in part is simple. Investors are unsure as to what U.S. listed companies will do with tax windfalls placed at their disposal by the Trump Administration.
If all of the windfall is passed on to either of employees in form of higher wages, or customers in form of lower prices for products, stock prices need not increase until productivity or demand effects kick in because absent productivity gains, and increase in demand for lower priced products, returns to shareholders remain exactly the same.
If companies divvy up the windfall between all stakeholders, it is unclear exactly what those divisions will turn out to be.
If some companies give all of the windfall to shareholders, it is clear share prices of those companies eventually will fall as demotivated employees and customers turn to other companies for products and careers. So long as there exists one big player in an industry willing to divvy up the windfall among all stakeholders, there will be divvying up of the windfall within the real sector of the U.S. economy. Uncertainty remains, however, as to exact outcome of the divvying up process.
I had been hoping the Trump Administration would adopt some sort of targeted combination of one-time payments and levies of taxes on additional profits which accrue from outsourcing for a period of say 5 years for dissuasion of frivolous outsourcing among U.S. companies. All monies raised from the one-time levy and levy on profit increments would be dedicated to re-training of people disenfranchised by companies’ outsourcing decision. Given combination of one-time levies, and levies on profit increments increase viability bars for profitability of outsourcing decisions, only the most credible outsourcing decisions would be undertaken by U.S. companies.
While I wish the policy I had in view were in play, a universal decrease in tax rates obviously can help prevent frivolous outsourcing. This requires of course willingness on part of U.S. listed companies to divvy up tax windfalls among stakeholders — employees and customers in particular. Uncertainty as to effectiveness of the tax windfall at mitigation of frivolous outsourcing of manufacturing or services outside of the USA continues to be a cause for concern.
Whenever return volatility within stock markets mirrors underlying uncertainties within real sectors, volatility is good. It is when return volatility within stock markets cannot be traced to uncertainties within real sectors that we must be wary. So go ahead and make an informed decision on what you think U.S. companies will do with their tax windfall and wait to see how right you turn out to be.
After all, a risky investment which lacks any risk at all only can be characterized as a misnomer.