Washington’s Impact on Wall Street
November 10, 2017
The stock market took the news of a delay in corporate taxes pretty hard on Thursday. The initial reaction saw the Dow Jones Industrial Average plunge 253 points before finding its footing. The selling was more of a reaction to confusion and a sense that the GOP could be on the verge of blowing it again.
These sorts of market reactions to news out of Washington, D.C. aren’t just knee-jerk whining, but they also serve as a warning to lawmakers to get their act together. Wall Street can live with the corporate tax cut coming one year later as long as it’s confirmed. However, Main Street isn’t going to be as happy as promised:
- Seven tax brackets
- No state and local deductions
There is potentially good news in the Senate plan, including allowing businesses to deduct all 2018 capital investments. Several economists think this provision could be the one that saves this bill and leads to 3%+ U.S. economic growth annually. However, this may not have the same impact on Main Street as a corporate tax rate, which would have a magnificent multiplier effect – increases in spending, income and consumption.
Delaying the new corporate rate for a year buys the GOP $100 billion. The corporate tax revenue is the smallest source to the federal coffers, which is why tax bill writers in the Senate will cast their eyes on the honeypot of individual income taxes.
Still, the market will watch the rest of this saga with bated breath, hopeful that the GOP gets its act together and refocuses on improving confidence and the underlying fundamentals of the economy.
Looking Beyond Capitol Hill
Part of yesterday’s weakness also had to do with profit-taking, specifically in big technology names such as Alphabet (GOOGL) as well as in large financial names like Goldman Sachs (GS). Interestingly, a lot of cash flowed into beaten-down sectors like retail. Consumer staples led the way along with brick-and-mortar stores.
This kind of rotation underscores a challenge for the rally beyond D.C. shenanigans. Where does the rally find leadership when the big tech names pause and pull back? Earlier in the year, there was a shift into banks. The problem here is that the banks moved away from their core business of lending as they live and die by trading activity.
Another red flag was market breadth, which can be measured in several ways from winners and losers to volume and even milestones. In fact, this was the first session in a long time that saw more 52-week lows than highs.
When stocks with improving fundamentals weaken, I definitely sit up and take notice. However, now is not the time to panic. Instead, it’s a time to keep our eyes peeled for bargain buying opportunities in great American companies.
Happy Veterans Day
Before I leave you, I wanted to take the time to thank those of you who have served. Make sure to thank a veteran this week and recognize their sacrifice.