Dollars and Sense: No stock market bubble here

Earnings strong. The stock markets didn’t have a lot of direction last week, although earnings reports were good. We’re now far enough into earnings season to say it’s a good one. More than a third of the companies in the Standard & Poor’s 500 index have reported, and 68 percent have topped estimates. That’s better than the long-term average of 63 percent, according to Thomson Reuters. Among companies releasing earnings last week that beat earnings expectations: Apple, Microsoft, PepsiCo, Comcast, Verizon, and Delta Airlines. So we saw positive results in virtually all sectors. Facebook was a notable example. It said revenue rose 61 percent and earnings easily beat estimates. Naysayers derided the company’s initial public offering, but the stock is now trading in the 70s, an all-time high and more than double its IPO price.

Markets flat. So why didn’t the markets shoot upward on all this good news? For reasons we’ve been talking about for the past few weeks. The markets are already way up over the past few months. These earnings reports are good, but that just confirms analysts’ and traders’ judgment. Current earnings do justify current stock prices. This is not a stock bubble, at least according to traditional price-to-earnings ratios. But these earnings don’t justify another bull run. And it’s important to note that there are still plenty of problems in the world. Investors remain concerned about geopolitical considerations. Russia and Ukraine, Israel and Hamas, Iraq and Afghanistan. Syria. Nigeria. They have a lot of reasons to be cautious about global stability.

Corporate inversions. I’ve been saying for months that merger and acquisition activity is on the rise, and I’ve discussed here the trend for U.S. companies to purchase foreign companies and move their headquarters to avoid U.S. taxes. It’s a phenomenon sometimes called “corporate inversions.” Last week, President Barack Obama spoke out against them at a trade and technical college in Los Angeles. I listened to that entire speech, and with all due respect to the president, it reflects either a profound ignorance about how economics works, or cynical political pandering. To begin with, the merger of two publicly traded companies is expensive. Companies engage in them only when they have clear economic reasons. In the case of corporate inversions, companies engage in them because the United States has some of the highest corporate taxes in the world. The companies are simply making a rational and predictable decision to legally lower their costs.

Are corporate inversions bad? If “bad” means immoral, illegal, or unethical: The answer is, plainly, no. If the goal is to enlarge the size of the U.S. government, then they certainly present a problem. That seems to be the president’s position. But if the president really wants to prevent inversions, he should advocate for tax reform that makes America competitive with the rest of the world.

Fair share. One of Obama’s key points of opposition to corporate inversions is that they allow companies to avoid paying what he calls their “fair share” of running the government. He went so far in his speech in Los Angeles as to say inversions contribute to the national deficit. Are these accusations true? No, and here’s why. When a company makes a profit, it does one or more of the following: hires more people (who come off unemployment or welfare rolls and pay taxes); invests more (often in facilities that pay property, business, and other taxes); pays its current employees more (who then pay more individual taxes); or distributes that profit to shareholders (who also then pay more taxes). All of these outcomes are good for people and good for the economy—and result in taxation. In fact, it’s possible to make a strong case for no corporate taxes at all because corporate taxes result in double-taxation.

The case for Delaware. The State of Delaware has laws very favorable for corporations. No corporate income taxes and other innovations have persuaded 50 percent of publicly traded companies and 60 percent of S&P 500 companies to incorporate in Delaware. The state has had those laws for 100 years, and I haven’t heard the president railing against it, in part because Delaware’s laws have helped make the United States the best country on the planet for capital formation. That’s good not just for Delaware but for the entire nation. Low taxes and low regulation encourage growth. Corporations that create jobs and take people off welfare and unemployment reduce the deficit. We need more of them, but high taxes are driving them away.