Short-Term Focus or The Discount Rate of the Stock Market

There is an interesting case study of how the recent US presidential election impacted the stock prices of firearm manufacturers counterintuitively. Below is a graph plotting the stock prices of both Ruger and Smith & Wesson in the weeks leading up to, and immediately after the recent election. Given that the incoming president would likely have a major impact on gun control in the US not only through policy, but also through appointing at least one justice to the Supreme Court it would make sense that the impact of the election would be large. What I find particularly interesting is that a Republican victory of both Congress and the Office of President seems like it would be less likely to result in gun control and in turn be good for gun manufacturers, but resulted in lower stock prices.  

I suspect it is non-controversial, but worth stating that the market value of an investment is what people are willing to pay today for cash flows throughout its future. People typically value cash flows nearer to today more highly than cash flows of the same size further in the future due to inflation, uncertainty in the future, and the opportunity for reinvestment. The rate at which someone is valuing future cash flows less than near-term cash flows is called the discount rate and usually expressed as a percentage (i.e. if I would consider $110 one year from now the same as $100 today my discount rate would be 10%).

An article published by the New York Times on spikes in background checks for the purpose of purchasing a firearm after major events that seem likely to increase the calls for more restrictive gun control helps shed some light on this. The data in the article show that gun sales spiked after 9/11, the first and second Obama elections (the second of which closely coincided with the Sandy Hook school shootings), and during a rash of mass shootings in December 2015 including the attack in Sen Bernardino. If the market was pricing in a spike in sales which would not materialize due to Republicans taking both Congress and the Presidency that would explain why the price of stock would decrease, but only if the long-term prospects were not impacted or did not matter in their valuations.  

An implication of this is that the market is valuing near-term cash flows so highly relative to long-term flows that extreme events, like tighter restrictions on gun ownership, don't materially impact the price of an asset. This has the positive benefit of holding managers accountable to delivering results and to provide grounded guidance on business performance, but runs the risk of discouraging investments with longer-term payoffs for more certain, near-term gains for publicly traded companies. If that risk materializes broadly it could lead to more volatility for workers as companies rise and fall more quickly and make public markets less attractive for innovative companies.