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Another Banner Year? Or Buy the Rumor, Sell the News?
12/25/2017 6:00 am EST
While businesses and individuals saw tax relief, investors did not see much change. From what I can tell, the maximum tax rate on long-term capital gains will remain at 23.8%, notes Mark Skousen, editor The 1600 Alert.
Tax cut fever already has propelled the stock market higher as we finish up 2017.
Now that the tax bill will become law on January 1, 2018, will Wall Street enjoy another banner year? Or will the maxim, “buy the rumor, sell the news,” be more appropriate, especially given that the market has not suffered a serious correction in years?
It may take a few months before the economic data kicks in and confirms the positive impact of the “Tax Cut and Jobs Act.” Past tax reductions always have taken a while to show up in the economy. Democrats and other critics of the tax legislation have argued that the tax cut only will help the rich and warned that most companies would use the extra money to buy back shares and raise dividends rather than to pay their workers more.
But in this case, the new tax bill’s impact has already been felt, as AT&T announced that it is giving all 200,000 employees a $1,000 bonus as a direct result of the corporate tax savings. And Wells Fargo and Fifth Third Bank said they would start paying a base pay of $15 an hour to employees.
Wall Street was particularly pleased with the anticipated dramatic drop in the corporate income tax rate from 35% to 21%. Personal income tax rates and deductions are far less generous, and are a mixed bag, doubling the standard allowance but sharply curtailing the deduction for state income and property taxes.
My wife and I met recently with Steve Forbes for an annual meeting to discuss current events and next year's FreedomFest.
Forbes told us he was disappointed in the tax bill, which he said makes a mockery of tax simplification. It will add thousands of new pages to the tax code and enrich accountants and tax attorneys.
Sadly, he’s right for the most part. Congress should have just focused on cutting the corporate tax rate to 21% and left personal tax returns alone. (Frankly, I’d be happy if the United States adopted a flat 21% individual income tax rate with a generous personal exemption. Now that's tax simplification!)
But it’s important to realize that the corporate tax relief is far more significant than personal income tax reform.
As my gross output (GO) statistic demonstrates, business is clearly the biggest sector of the economy, with more than 60% of total economic activity compared to 31% for consumer spending. So, a substantial cut in business taxes will have immense benefits in increasing cash flow, profits and job creation. And unlike the personal tax changes, the 21% corporate rate is permanent.
What could kill this bull market? Rising interest rates, for one. The Fed has threatened to raise short-term interest rates, but the U.S. central bank really does not have much room to raise rates very much as long as long-term rates don’t increase.
The 10-year and 30-year Treasury bond rates are still below 3%, despite positive jobs reports and a booming economy. Meanwhile, the 3-month T-bill rates are inching up to 1.3%. The Fed is unlikely to create a negative yield curve, which could push us into another recession and bear market.
While businesses and individuals saw tax relief in this bill, investors did not see much change. From what I can tell, the maximum tax rate on long-term capital gains will remain at 23.8%.
Overall, the 2017 tax cut is a welcome gift to us during the holidays that will pay dividends into the future.
I wish you all a very Merry Christmas and a most happy, prosperous New Year!
Orlando MoneyShow, February 8-11, 2018: I’m delighted to return to the Orlando MoneyShow, where I will be giving a new presentation on “ETFs vs. Mutual Funds, Why You Need Both! (Plus, My Five Favorites).” I’ll also be doing an encore of the “great debate” with Mike Turner on “The Economics Professor vs. the Mathematician: Buy-and-Hold vs. Market Timing.” To sign up for your complimentary tickets, go to Skousen.OrlandoMoneyShow.com.
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