It’s been a strange time for investors. It feels like there’s been a constant hint of chaos in the air. Whether it’s been the special investigator at the White House, North Korean missile tests or legislative failures in congress… Dark clouds are constantly hovering…
But the markets have shrugged off just about every twist and turn of every bad news cycle. The markets just continue to chug upwards in their current bull ride.
So how is that the market is shrugging all of this off? Well, it’s all about risk. The market sees only sunny skies from the current administration. Which makes sense. The tax proposals on the table will give a massive tax cuts to companies and pass off the burden of these cuts into the future.
But don’t be fooled. There are massive risks out there. And the market is not pricing them in. And when it does, the market it going to get volatile. And when we say volatile, we mean the market will get unpredictable. And we’ll see a lot more down days.
So what is the market missing?
First of all, the true cost of the cuts in the tax bill are being swept under the rug. The framers of the bill argue that these cuts will pay for themselves. Research shows that this is extremely unlikely. In fact, some good research essentially “eviscerates” the math. Congress’ Joint Committee on Taxation, for one, says that the bill will raise the economy by just 0.8%, not the 3% to 4% being touted. So the math behind the cuts is at best misleading, at worst dishonest.
Secondly, CEOs are already saying that the money gained from corporate tax cuts is more likely to go to shareholders through share buybacks and dividend increases than to employees or into growing their businesses. So again, the the cuts that are supposed to bring economic growth will probably instead go into some already fat wallets.
Thirdly, the tax proposal is being funded by debt. Maybe as much as $1.4 Trillion dollars worth. And when there is little savings going on in the economy and interest rates ready to rise, the borrowing will be hard to pay off in the future. It’s great for the Octogenarians and Septuagenarians that are voting for this bill. Not so great for our kids and grandkids…
And finally, there is that little issue about the US President. Even though he has been acting with impunity, there is a chance that a day of reckoning will come for him. And it hinges on a potential indictment. And with news that Michael Flynn is cooperating with investigators, the drop in markets Friday show us that the market really does care about what is happening in the White House.
At GoldBean, we’re not just shrugging off the dark clouds. Remember that lower corporate taxes have for the most part been ‘priced in’ – meaning that the market has assumed that taxes are going down, and that profits are going up. Investors have made money on that assumption already.
If the good news is priced in, it’s the bad news that will start to move the markets. The US is a consumer driven economy. Giving tax treats to companies, funded by the American consumer will work in the short term to pump up the market. But should households have less money to spend, and companies see sales and revenues dropping because of it, no amount of financial shenanigans can pump up the top line. And if the government needs to cut back on services because of a financial shortfall, consumers will have to shift money to cover those services. If consumers get hit, a day of market reckoning will come.
With rumors of pending tax cuts almost behind us now, it’s time to turn your radar on for bad news. News of lower consumer spending, rising federal deficits, rising trade deficits, cuts in government services, lower tax revenue and actions by the special investigator will all hurt the markets.
As the adage goes: Buy on rumor, sell on news.