Don’t Worry, Insider Trading Doesn’t Hurt Your Retirement Savings

Another Trump tweet has sent the media into a frenzy. The culprit this time – a tweet by Trump at 7:21 am on Friday June 1 with the seemingly innocuous text, “Looking forward to seeing the employment numbers at 8:30 this morning.” So what’s the problem? Well, apparently the president usually finds out the job numbers for the month the night before they are released, but it is illegal for them to make any comment until at least an hour after they are made public the next day.

Even with this information it might still not seem like such a big deal, but we are dealing with Trump so any opportunity to attack will surely be taken. The issue (if you can call it that) with Trump hinting at a good jobs report before it’s official release is that it gives some financial traders an unfair advantage. Good jobs reports tend to increase stock prices so somebody who happened to notice Trump’s tweet could have used the information to preemptively buy up some stock in anticipation of a rise once the information was made public. In this sense, Trump’s tweet could be seen as a kind of “insider trading” (except that’s a bit of a stretch since it was a public tweet before the markets opened – but let’s forget that for now).

Betsey Stevenson and Justin Wolfers, two professors at the University of Michigan, took particular exception to the tweet. Stevenson questioned who else Trump tips off about the numbers, tweeting: “Privately leaking this information makes money for those who get it. Where does the money they “make” come from? People who don’t have the information.” Wolfers piled on with “Betsey’s point is spot on: If someone made money trading on a tip from the President, who do you think they’re making it from? It’s you. Your retirement account. The money’s got to come from somewhere, after all.”

Both Stevenson and Wolfers’ comments stem from the idea that when a speculator makes money, they are stealing that money from your retirement. Though they frame it in terms of insider trading, their logic is applicable to any situation where a financial transaction results in a gain. All financial transactions are zero-sum. Somebody can only buy a stock if somebody else is willing to sell. If the price of the stock subsequently increases, the buyer wins and the seller loses.

So it’s certainly true that somebody lost out from Trump’s tweet. But somebody also loses when the job numbers are revealed normally. Whoever trades first is going to gain the most from the new information being revealed. The poor guy who sold the stock (almost certainly another speculator) misses out (but note that even he doesn’t actually lose money, just fails to realize potential gains). What is less clear is why this process would have any effect on anyone’s retirement accounts.

If your retirement account relies on making money from short term fluctuations in stock prices, you are doing something very wrong. Take a look at this graph of the S&P 500 index over the last 5 days:

Source: CNN Money

The gains here are probably all going to speculators trying to play the market. They want to buy the lows and sell the highs and come out ahead. Some will win and some will lose. In the short run, the gains and losses approximately cancel out. Your retirement account doesn’t work this way. Here’s what the 5 year S&P 500 looks like:

Source: CNN Money

It’s not the up and down fluctuations of the stock market that provide the returns on your retirement. It’s that long term upward trend. Unlike the zero-sum game that makes up speculative short-term trading, these long term gains accrue to everybody who owns stocks (most retirement accounts are based on index funds so they should move around the same as the return shown here). Rather than constant trading to try to make a quick return, retirement earnings rely on buy and hold strategies. Barring major anomalies like a recession right before you plan to retire, day to day movements of the stock market should be of little concern to almost everyone.

And the best part, contrary to Stevenson and Wolfers’ claims, the money people “make” on these long term investments doesn’t actually have to come from anywhere, at least not directly. When the stock market works as it should, long run gains come from economic growth. Companies continuously inventing new ways to provide more and better products to consumers drives up the value of their business, and therefore their stock price. Your retirement account going up does not mean somebody else’s went down. Technological progress, new ideas, and the brilliant people behind them pull everyone up simultaneously.

Unfortunately, the kind of thinking that makes people worry that one person’s gain is another’s loss is prevalent across many economic discussions. Trump’s views on trade seem to follow a similar pattern. When you buy something made in China that’s not a gain for China and a loss for you. It’s good for both sides. Many also seem to have this view of profit. When a firm makes profit, it is not stealing from its workers. I’m planning another post on the profit issue soon. Hopefully less than two months in between posts this time.

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