What does Wall Street really want from Washington?
The short answer: tax reform.
How do we know that? Well, in today’s meeting with airline executives, President Trump commented on the future of tax policy. Mr. Trump said he would make an announcement that would be “phenomenal in terms of tax” within the next three weeks.
Although there wasn’t anything more specific said about tax reform, stocks extended their early gains immediately following the comments. The Dow, S&P 500 and Nasdaq all vaulted to new highs during Thursday trade.
“Stocks are ripping because of President Trump’s comments,” said R.J. Grant, director of equity trading at KBW Inc., in an interview with the Wall Street Journal.
The possibility of tax reform, particularly corporate tax reform, is something we’ve been telling readers is key to sustaining and building on the post-election gains.
The reason why is simple. If corporate taxes can drop to 20% from their current 35% level, that would serve as an immediate boost to corporate bottom lines.
The only problem with getting corporate tax reform passed is the issue of a “border adjustment tax.”
|Stocks jumped this morning when President Trump said a “big-league” tax announcement will be coming soon.|
Why are border adjustments a problem? Well, for one, they’re essentially tariffs on goods coming into the country.
Tariffs mean higher prices for consumers, and consumers don’t like paying higher prices.
But what do tariffs on goods coming into the country have to do with corporate tax cuts?
Well, it’s because a border-tax adjustment, or BAT, is the preferred tool of the more-fiscally hawkish Republicans in Congress who want to make sure any corporate tax cut is “revenue-neutral.”
The term revenue-neutral just means that any tax-reform proposals won’t add to nation’s budget deficit, or the national debt.
So, cut corporate taxes if you must, the hawks say. But to “pay for it,” we must increase other types of taxes, and/or propose new taxes, so that the net cost to the government is zero.
This may seem a scheme that robs Peter to pay Paul. It can also seem like an exercise in futility. After all, shouldn’t the goal be to reduce taxes on business, grow the economy and reduce the size of government?
Yes, this is the libertarian in me coming out. But I don’t see how a goal of maintaining the current size and scope of government is a noble or constructive objective.
Moreover, any border-adjustment tax is a very regressive form of taxation. That means it will hurt low-income and middle-income American consumers the hardest.
The reason why is because higher taxes on incoming goods will, in all likelihood, make the cost of everyday goods more expensive.
That is the conclusion of the National Retail Federation, which has started a campaign called “Americans for Affordable Products.”
In one policy statement, the group argues against a border-adjustment tax, saying it:
“ … slaps outrageous taxes on imported goods — like clothing, food, medicine, and gasoline — products Americans rely on every day.”
The group continues to argue against the tax, saying:
“The Border-Adjustment Tax is a trillion-dollar tax break for a few corporations and a $1,700 bill for ordinary household expenses delivered to the address of every hardworking American family.”
While Wall Street wants lower corporate taxes, and while most investors will keep smiling when stocks keep making record highs …
The result of the fight over the BAT could be the biggest issue affecting the market’s intermediate future.
The next few weeks of gaming what tax reform might look like — i.e., a BAT or no BAT — will be interesting and market-moving.
Of course, our job here at Uncommon Wisdom Daily is to make sure you know what’s happening with this issue, and more importantly, what you can do to profit from whatever tax reform measures are passed. So, stay tuned!
Traders have been worried that tax reform may have slipped from the top of President Trump’s priority list. But then today, he said a “big-league” announcement is coming in the next few weeks and it “will be phenomenal.” And that sent stocks off to the races.
We saw a trio of new closing highs today, with the Dow, S&P 500 and Nasdaq gaining 0.6% apiece. Energy (XLE, +1.1%) and financial (XLF, +1.4%) stocks led the way higher.
• JPMorgan Chase (JPM) became the first U.S.-based bank to receive a license to underwrite corporate bonds in China, which is the third-largest bond market by issuance.
• And Citigroup (C) became the first U.S.-based bank to receive a “Type A” license to act as a bond settlement agent in China’s interbank bond market.
• A federal judge upheld the rule that requires brokers to put their clients’ interests before their own financial gain when offering individualized retirement advice.
• Another federal judge nixed Anthem’s (ANTM) bid to buy fellow insurer Cigna (CI). Anthem’s stock rose 2% as the company considers whether it will appeal the decision. This follows last month’s rejection of Aetna’s bid to buy Humana.
• Twitter (TWTR) fell 12.3% after its Q4 earnings beat on the top line (16 cents per share vs. 12 cents expected) but missed on the bottom line. Revenues were $717 million vs. $740.1 million. The social media firm also guided lower for Q1 ($75M-$95M vs. $191.3M expected) despite an increase in engaged users. One theory behind the miss: With so many company heads worried about a potential Twitter missive from the president, would-be TWTR advertisers may also be wary.
• Nordstrom (JWN) gained 2.3% (on top of yesterday’s 4.1% gain) after being targeted Wednesday from both Twitter accounts under President Trump’s control. JWN’s move higher, its best two-day gain since before the holidays, translates into an extra $450 million of market value.
• Crude closed 1.3% higher as the market now sees growing gasoline stockpiles as a sign of higher demand.
Good luck and happy investing,
Uncommon Wisdom Daily