corporate taxes, consumer spending and the stock market

It looks as if the top Federal corporate tax rate will be declining from the current world-high 35% to a more median-ish 20% or so.  The consensus guess, which I think is as good as any, is that this change will mean about a 15% one-time increase in profits reported by S&P 500 stocks next year.

However, Wall Street has held the strong belief for a long time that this would happen in a Trump administration.  Arguably (and this is my opinion, too), one big reason for the strength in US publicly traded stocks this year has been that the benefits of corporate tax reform are being steadily, and increasingly, factored into stock quotes.  The action of computers reading news reports about passage is likely, I think, to be the last gasp of tax news bolstering stocks.  And even that bump is likely to be relatively mild.

In fact, one effect of the increased economic stimulus that may come from lower domestic corporate taxes is that the Federal Reserve will feel freer to lean against this strength by moving interest rates up from the current emergency-room lows more quickly than the consensus expects.  Although weening the economy from the addiction to very low-cost borrowing is an unambiguous long-term positive, the increasing attractiveness of fixed income will serve as a brake on nearer-term enthusiasm for stocks.


What I do find very bullish for stocks, though, is the surprising strength of consumer spending, both online and in physical stores, this holiday season.  We are now nine years past the worst of the recession, which saw deeply frightening and scarring events–bank failures, massive layoffs, the collapse of world trade.  It seems to me that the consumer spending we are now seeing in the US means that, after almost a decade, people are seeing recession in the rear view mirror for the first time.  I think this has very positive implications for the Consumer discretionary sector–and retail in particular–in 2018.

confidence and narratives

Two recent items coming across my inbox:

I’d known there has been a striking favorable turn in consumer confidence in the US since the presidential election, but I hadn’t focused on how large a jump there has been until I read the latest strategy piece by Jim Paulsen of Wells Fargo.  We’ve gone from being mired deep in the bottom half of confidence readings over the past thirty years to high in the top quartile–over the 90% mark by some measures, and at the highest levels since before the Internet bubble burst in early 2000.

Paulsen’s conclusion:  earnings growth may be higher, and stock market performance in 2017 better, than the consensus expects.  I’m not sure I’d bet the farm on this, but it is at the very least a reason to refrain from selling–and to be wary of becoming too defensive.


I’ve also read the Presidential Address for the American Economics Association, titled Narrative Economics, by Robert Shiller, a former Wall Street economist who is now a professor at Yale (he’s also the Shiller from the Case-Shiller Home Price index).

I’ve never been a particular Shiller fan, and this is a weird paper, but it’s relevance is in its attempt to identify and measure the psychological influences that affect economic performance.  Its point is that story lines like those encapsulated in slogans like “Drain the Swamp” or “Make America Great Again” can have an unusually strong positive influence on actual economic outcomes.  This can come well in advance of delivery on the promises being made.  So even though my reading of Donald Trump’s career is that his sole personal success has been as an actor portraying a successful businessman on a reality show, it may be that his being a symbol of the need for change may be enough to energize the US for a while.  If he actually can achieve tax reform and an infrastructure spending program, so much the better.