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Dimming Prospects on Wall Street

Like many Americans on August 21, I went outside to catch a glimpse of the solar eclipse. I admit to not sharing the deep level of fascination some people have with what is essentially a cosmic coincidence, but if nothing else the spectacle was a welcome respite from a rough couple of weeks for the stock market.

Wall Street experienced an eclipse of its own in August. But instead of being caused by the movement of celestial bodies, this dark passage for stocks was initiated by disturbing events at home and abroad. Bellicose rhetoric erupted between North Korea and the U.S., stoking fears of nuclear conflict. Shortly thereafter, President Trump publicly feuded with corporate CEOs who abandoned his advisory councils in droves in the wake of Trump’s maladroit handling of the Charlottesville riots.

The fact that a potential shooting war in Asia may be brewing combined with a widening schism between corporate America and the most powerful person in the country sent shivers through anxious investors. The S&P 500 shed more than 2% of its value in the days that followed, setting off alarms that the “Trump rally” that drove the index more than 12% higher since Election Day on November 8 may soon be coming to an end.

It’s too soon to determine if any lasting damage has been done by these events, but the simultaneous 40% jump in the VIX, or “fear index,” suggests investors are starting to worry. That’s normal, and by itself is no reason for alarm. But if a rising VIX causes investors to question the stability of the financial system and take refuge from the stock market, it could trigger the correction that I’ve been expecting to happen this year.

However, if a tax reform bill is enacted, all of these bad feelings could disappear just as quickly as a solar eclipse, bringing sunshine back to the markets. But in this case, it may be the sunshine that is temporary since historical precedent suggests that a major tax bill may only have an ephemeral effect on the stock market.

With details of the Trump tax bill slowly emerging, it would be premature to opine on its potential impact on the stock market and the economy. But this week Trump revealed that a tax break for corporations repatriating cash back to the U.S. would be part of it, setting off a debate as to the extent to which that money will stimulate the economy versus going directly into shareholder’s bank accounts.

The last time Congress approved a tax repatriation “holiday” was in 2004, which resulted in more than $300 billion being brought back home from overseas. However, there is scant empirical evidence to suggest that it had a lasting stimulative impact on the national economy. That’s why I believe it would be better if this time the tax break was contingent on a meaningful percentage of the repatriated money being invested in jobs, equipment or other anything else that would put more cash in circulation.

Otherwise, the more likely outcome is that most of this money will be used to repurchase stock, pay down debt, or acquire assets from other companies. That may be beneficial for shareholders of those companies, but not helpful to the overall economy.

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