Tahoe Market Pulse: The market and taxes
Depending on your view, President Trump is either off to a good start as he makes good on his campaign promises, or it’s a shaky one full of inappropriate tweets and legal missteps. For Wall Street, however, nothing matters more than the promise of lower taxes.
That played out last week as details of big-time tax cuts were leaked. Stocks rallied on news that corporate taxes would fall from 35 percent to 20 percent and all investment-related taxes would at least be cut in half. Individual tax brackets would be lowered, too.
The irony is that Trump promised that he wouldn’t go east on Wall Street, but lower taxes on investments and less regulation are Wall Street’s best friends. For those that thought he’d be tough on Wall Street I’m reminded of quote, “It’s easier to fool people than to convince them they’ve been fooled.”
Of course these changes have to go through congress (enter politics). The speed with which taxes will be cut, regulations axed and spending increased may slow. Investors and business people need numbers before they put capital to work. Will the new tax rates be retroactive to January 1? Yes, if passed soon. No, if signed in the second half to be effective then.
The strength in stocks points to higher corporate profits and a stronger economy, but not all of Wall Street agrees. As good as the S&P 500 is this year (up 3.5 percent through last week), the iShares Preferred Stock ETF (PFF) is up by just as much.
That wouldn’t happen if it was a foregone conclusion that economic growth would improve by more than a little. There are economic headwinds. Baby boomers are retiring and jobs are being filled by robots and computers. Times are changing.
The market’s bottom line: The odds favor a continuation of the positive factors that have propelled the market higher and higher. Anticipation of better days and with them rising earnings, plus the unattractiveness of the alternatives to stocks, are the market’s key drivers.
But anticipation can take the market just so far. At some point (soon would be nice) better days need to appear, not be over the horizon. Of course, there will be periodic selling. There always is.
But history is clearly on the side of the optimists who see a glass half full, not half empty.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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