Will Today's Stock Market Rally Be Any More "Real" Than Friday's Dip?
Stocks plummeted on Friday when it was reported that General Michael Flynn had plead guilty to lying to the FBI and would testify against President Trump, implicating him in some sort of illegal activity. As it turned out, the first part of was right (he plead guilty), but not the second. The second was what has become known as "fake news." Flynn won't testify against Trump. As the market absorbed this, prices turned around, finishing lower, but far from the lows.
At that point, politics took over and reports that the "fake news" had tanked the market emerged. It's more likely, though, that the market was simply overextended and "looking for" an excuse to pull back. But the media had its fun nonetheless - one reason we limit our exposure to their shenanigans. You might consider a similar approach.
Today, we see global stocks rising in tandem. The reason? Investors have absorbed the details of the tax bill that is expected to be passed by the U.S. Congress some time this week or next. This morning, futures point to a fairly powerful spike up. If this carries into today's trading session, we'll likely hear about how this tax bill will inject the juice needed for a global economic expansion.
But, as with Friday's plunge, the truth will likely be somewhat different than the price action in stocks might indicate. First of all, the idea that a change in U.S. tax law would ignite the world's economies does seem a bit stretched. Can any one country have such a profound effect on the entire world any more? It's not like the days when the U.S. economy really did dominate the part of the world not under the heavy wet blanket of Communism whether of the Russian or Chinese variety. Then the "free" economies could be pushed one way or the other by how things went in the U.S. It's different now. We're not so sure the world really hangs on the U.S economy as much.
Then there's the reality of what the likely tax bill will actually effect. Our previous post provided a basic outline and the adjustments made last week don't really change that much. For many Americans who aren't rich, this tax bill won't have much positive impact, although it will be "sold" to them as if it will. We'll have to wait and see whether Americans drink the Kool Aid or not on this. If not, and if it results in a loss of confidence that the Trump administration is looking out for their interests, there might be blowback on the stock market.
The big item, of course, will be the corporate tax cuts, as well as a tax break that will supposedly cause companies to "repatriate" assets they hold overseas to avoid paying U.S. taxes. On the face of it, the cuts seem to be a real shot in the arm for the bottom line of American corporations, especially large corporations. But let's take a deep breath here and consider:
First, many corporations weren't paying taxes at the highest rate in the first place. They use sophisticated tax planning to lower their tax bill. Will they save more with the current cuts? That's not certain.
Second, as for repatriation, one school of "experts" claims that some $1 trillion + will "come back" to the U.S. This paints an image of some trillion or so of money gushing into the U.S. from somewhere outside, to provide a tidal wave of liquidity that companies will subsequently rush to invest in the U.S. (In what, I'm not sure.) It's certainly a powerful image. But just as perception and reality don't always coincide, another school of "experts" points out that the actual money has been in the U.S. all along. It was simply owned by legal structures located outside the States. So there will be no gush. The question is whether that money sitting there all along will somehow be deployed in a different fashion than it has already been, causing a surge of economic activity. And here we ask ourselves whether the mere presence of cash in the pocket will generate a spending spree. There would have to compelling opportunities to spend the cash here vs. spending it overseas. What might these be? I've heard infrastructure, for one. But haven't we been hearing this for months now? Any progress made yet? So at this point, the idea that the cash will be freed up and spent is more an unknown than a sure bet.
Which brings us to today's stock market action and whether it will tell us anything about the future. Here's a suggestion: If it explodes and fires up another round of gains going forward, it will tell us that the bull market that began in 2009 will continue, but not necessarily because of any anticipated tax-cuts. It's more a confirmation of a strong trend firmly in place. It may not be driven by the impact of U.S tax policy on the economy of this country or the rest of the world at all.
At that point, politics took over and reports that the "fake news" had tanked the market emerged. It's more likely, though, that the market was simply overextended and "looking for" an excuse to pull back. But the media had its fun nonetheless - one reason we limit our exposure to their shenanigans. You might consider a similar approach.
Today, we see global stocks rising in tandem. The reason? Investors have absorbed the details of the tax bill that is expected to be passed by the U.S. Congress some time this week or next. This morning, futures point to a fairly powerful spike up. If this carries into today's trading session, we'll likely hear about how this tax bill will inject the juice needed for a global economic expansion.
But, as with Friday's plunge, the truth will likely be somewhat different than the price action in stocks might indicate. First of all, the idea that a change in U.S. tax law would ignite the world's economies does seem a bit stretched. Can any one country have such a profound effect on the entire world any more? It's not like the days when the U.S. economy really did dominate the part of the world not under the heavy wet blanket of Communism whether of the Russian or Chinese variety. Then the "free" economies could be pushed one way or the other by how things went in the U.S. It's different now. We're not so sure the world really hangs on the U.S economy as much.
Then there's the reality of what the likely tax bill will actually effect. Our previous post provided a basic outline and the adjustments made last week don't really change that much. For many Americans who aren't rich, this tax bill won't have much positive impact, although it will be "sold" to them as if it will. We'll have to wait and see whether Americans drink the Kool Aid or not on this. If not, and if it results in a loss of confidence that the Trump administration is looking out for their interests, there might be blowback on the stock market.
The big item, of course, will be the corporate tax cuts, as well as a tax break that will supposedly cause companies to "repatriate" assets they hold overseas to avoid paying U.S. taxes. On the face of it, the cuts seem to be a real shot in the arm for the bottom line of American corporations, especially large corporations. But let's take a deep breath here and consider:
First, many corporations weren't paying taxes at the highest rate in the first place. They use sophisticated tax planning to lower their tax bill. Will they save more with the current cuts? That's not certain.
Second, as for repatriation, one school of "experts" claims that some $1 trillion + will "come back" to the U.S. This paints an image of some trillion or so of money gushing into the U.S. from somewhere outside, to provide a tidal wave of liquidity that companies will subsequently rush to invest in the U.S. (In what, I'm not sure.) It's certainly a powerful image. But just as perception and reality don't always coincide, another school of "experts" points out that the actual money has been in the U.S. all along. It was simply owned by legal structures located outside the States. So there will be no gush. The question is whether that money sitting there all along will somehow be deployed in a different fashion than it has already been, causing a surge of economic activity. And here we ask ourselves whether the mere presence of cash in the pocket will generate a spending spree. There would have to compelling opportunities to spend the cash here vs. spending it overseas. What might these be? I've heard infrastructure, for one. But haven't we been hearing this for months now? Any progress made yet? So at this point, the idea that the cash will be freed up and spent is more an unknown than a sure bet.
Which brings us to today's stock market action and whether it will tell us anything about the future. Here's a suggestion: If it explodes and fires up another round of gains going forward, it will tell us that the bull market that began in 2009 will continue, but not necessarily because of any anticipated tax-cuts. It's more a confirmation of a strong trend firmly in place. It may not be driven by the impact of U.S tax policy on the economy of this country or the rest of the world at all.
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