The past 40 years have seen tremendous changes in the US economy and in US stock markets. At the beginning of the 1980s, stock markets were still suffering from the malaise that had beset them since the mid-1960s. It wasn’t until late 1982 that stocks suffered their final nadir, and they’ve been rising ever since.
The 1982-2000 bull market in stocks saw phenomenal growth, with greater than 15% annualized gains over that period. It made a great number of American investors incredibly rich, and it has influenced investment advice and investor behavior until today.
The latter half of that bull market was influenced by developments in the tax code that have gone on to impact corporate strategy and stock market performance ever since. And with new changes President Biden is proposing to the tax code in order to pay for his proposed infrastructure plan, there could be an even greater impact on stock markets in the future.
Executive Compensation and Stock Markets
In 1994, Congress passed new tax laws that resulted in new restrictions on corporate executive compensation. With President Clinton having campaigned against excessive executive compensation, Congress passed new laws to limit it. One new part of the law was codified at section 162(m) of the Internal Revenue Code.
This new section capped the amount of salary, bonuses, or stock grants that companies could treat as deductible for tax purposes at $1 million. This was supposed to limit the ability of companies to provide “excessive” compensation to their highly-paid C-level executives. But because performance-based compensation such as stock options remained deductible, companies decided to move away from large salaries to compensate executives and towards stock options.
Shareholders are responsible for approving performance-based compensation packages, and in many cases they’re nothing more than a rubber stamp. As long as stock prices are rising, shareholders aren’t going to disapprove a compensation package.
In many cases, executives post-1994 had the potential to receive millions of dollars in compensation for exercising their stock options, making those far more lucrative than their salaries. And because their total compensation was now tied to stock prices, the incentive for executives was to take actions to maximize stock prices in order to maximize their compensation.
This set off a change in corporate strategy, with executives focusing on stock price growth as the primary indicator of performance rather than metrics such as sales, revenue, or profit. As a result, we have seen an explosion in corporate stock buybacks, with executives using profits to buy back shares. Buybacks boost earnings-per-share ratios, a key indicator used to assess corporate performance. And they also boost stock prices, helping to enrich corporate executives with generous stock option packages.
This is also what has been behind the motivations of some venture capitalists and corporate raiders. They look to purchase companies, strip them to the bare bones, then take them public again to benefit from share price growth. Long-term growth of the company is sacrificed in order to boost short-term profits.
What Biden Plans to Do
President Biden plans to pay for his infrastructure plan by raising taxes, and particularly by raising taxes on high earners. He plans to raise the top marginal income tax rate from 37% to 39.6%, and to implement Social Security payroll taxes on incomes exceeding $400,000. With the existing 3.8% Medicare payroll tax, that would raise the current marginal taxes on each dollar earned over $400,000 from 40.8% to 55.8%, a 37% increase.
Imagine having your tax rate rise by 37%. That’s going to disincentivize a lot of high-earning people and leave them looking to minimize their tax hit. A lot of companies will understand that, and likely begin to offer more stock options as compensation in order to help top employees get around the new tax increase. That will lead to even more pressure within public companies to keep stock prices rising so that employee compensation will be maximized.
Why This Matters to You
Because the maximization of stock prices has become such an all-consuming part of corporate strategy today, many companies have maximized short-term growth at the expense of long-term survivability. Stock price numbers may give the appearance of good health and good economic performance, but the reality is that many US companies are but a shell of their former selves. They maximize tax writeoffs and accounting gimmickry to boost their financial numbers in the present without a care for their future. Their executives are short-term caretakers, and will leave shareholders and future executives holding the bag.
Many corporations have also taken on massive debt loads in order to buy back shares and maximize share prices. And a growing number are becoming zombie companies, failing to make enough money even to pay the interest on their debt.
The outlook for the future is, therefore, bleak for a growing number of companies. And the prospects for stock market growth are similarly bleak. With companies being weighed down by debt, corporate bankruptcies will become a growing concern in the future, and long-term growth could become increasingly difficult.
If you’re invested in stocks, the fact that so many companies are trying to maximize short-term price growth potentially at the expense of long-term investors could be worrying to you. And that’s why you ought to evaluate your investments to determine whether you think they’ll continue performing well in the future, or whether you need to rethink your investment strategy.
An increasing number of investors are worried about the long-term potential for stock markets, and are turning to alternative assets such as gold and silver. In fact, gold and silver have outgained stock markets in terms of average annualized gains this century. And if stock market growth remains weak, gold and silver could end up continuing that performance well into the future.
Do you have investments that you’re worried about, particularly retirement savings in tax-advantaged retirement accounts? Then maybe it’s time for you to learn more about investing in a gold IRA. With a gold IRA, you can invest in physical gold coins or bars while still enjoying the same tax advantages as your existing retirement accounts. That allows you to reap the rewards of gold’s future price growth while maintaining your current tax treatment.
Don’t let another day go by without exploring all of the options available to you to protect your retirement savings. Call the experts at Goldco today to find out how gold and silver can help safeguard your investments.