Tax plan could mean good things for stocks
The much anticipated tax plan, crafted by the Trump administration and Republican Congressional leadership, is expected to be unveiled Wednesday, and that could provide positive momentum for stocks in the final week of the quarter.
Stocks are heading into the final days of the third quarter with solid gains and have avoided the correction expected by many strategists in August and September.
The S&P 500 (.SPX), flat in the past week, is up 3.2 percent for the quarter so far. The Dow, (.DJI) up fractionally in the past week, is up more than 4.5 percent for the quarter. The Nasdaq was down about 0.4 percent for the week but up 4.6 percent for the quarter. While the market indices are near record highs, the Russell 2000,(.RUT) which had been lagging, was the only one to end the past week at a fresh high.
“Any sort of good news for pushing Trump’s agenda forward, considering nothing is getting done on the economic side, would be a big deal,” said George Goncalves, the head of fixed income strategy at Nomura. “It might rekindle some of the Trumponomics fervor we had in the beginning of the year.”
While there are no details yet, the tax plan is expected to cut corporate taxes to the low 20s percent from a current 35 percent rate, and allow for repatriation of foreign profits by multinational companies. It is also expected to include a proposal for a territorial tax base, so companies are no longer encouraged to keep taxes off shore due to higher U.S. taxes.
Individual tax rates are also expected to be cut, with the focus on the middle class. But the tax bill must still make it through Congress, and that may not be an easy process as efforts to pass a new health care bill have shown. The fate of that effort was unclear late Friday when Sen. John McCain said he would not vote in favor of a Republican bill and would work with Democrats on a bi-partisan plan.
“While Congress has shown reticence to pass any bills, there’s more support for tax cuts than there is for health care. Details around the edges are going to be that it comes out and saves $1.5 trillion over 10 years and will not be revenue neutral and it doesn’t take away popular deductions,” said Art Hogan, chief market strategist at Wunderlich Securities. “The market is going to see for the first time if this new administration can get an agenda item accomplished.”
Goncalves said the tax announcement should be positive but warned that if bond yields run up too much or too quickly on the tax news, that could stall out an equities rally.
Treasury yields in the past week were higher, after the Federal Reserve Wednesday announced that it would buy fewer Treasury and mortgage securities and gradually increase that amount, in an effort to shrink its $4.5 trillion balance sheet. The Fed also retained its near term forecast for another interest rate hike this year and three more next year, boosting market expectations for a December rate hike well above 60 percent.
Fed Chair Janet Yellen, who briefed media after the Fed meeting, speaks again on Tuesday as the key note luncheon speaker at the National Association of Business Economists meeting.
“We’re shifting the focus away from the monetary policy side of things to fiscal policy. Though Yellen will be important, it most likely will be more about any kind of good news on getting details on tax reform,” Goncalves said. He said he is watching Yellen to see if she discusses inflation, which the Fed has said is being kept low by transitory factors.
There is an important piece of inflation data Friday, the personal consumption expenditure prices data. Core PCE is expected to rise by 0.2 percent in August, after a 0.1 percent gain in July. There is also personal spending and consumption data, expected to show a gain of 0.2 percent in spending, and a gain of 0.4 in income.
“I would expect it to move away from its 1.4 percent trend it’s been in for the summer here…probably move up to 1.5 to 1.6 percent year over year,” Steve Rick, chief economist at CUNA Mutual Group.
He said there could be a pickup in spending because homeowners in hurricane-hit areas stocked up on goods from hardware stores and elsewhere ahead of the storms. Hurricane Harvey hit Texas in the last several days of August, while Irma slammed Florida in September. Hurricane Maria left a trail of destruction across Puerto Rico in the past week, and the island is now without water and power.
But the August number will not show much storm impact. There has been an elevation in unemployment claims in the last several weeks, and that could continue.
“It probably will have more impact on the income number than the spending number,” Rick said.
He said consumer confidence Tuesday and consumer sentiment Friday could show a trend higher. “The stock market keeps hitting record highs..the market and real estate…that’s the biggest driver of why people have confidence and feel good,” he said.
There are several earnings in the week ahead including the cruise line Carnival, which will is expected to discuss the impact of hurricanes Tuesday when it releases earnings. Nike and Micron also report that day.
Fed speakers are also back on the speaking circuit after this week’s meeting. Besides Yellen, there are more than a dozen speaking events.