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Stocks Rally as Tax Bill Comes Back to Life

By John Persinos on December 15, 2017

Donald Trump’s economic plans could fit in a tweet: cut taxes and regulations, erect trade and immigration barriers, boost defense, favor oil, confront China, embrace Russia.

This week, only one goal matters to Wall Street: cut taxes.

The three major indices soared Friday. Renewed tax bill hopes provided the fuel. The health, retail and technology sectors were the top gainers.

Traders shrugged off recent snags with tax overhaul. The GOP tax bill is nearing the finish line.

The bill, in its current form, proposes a corporate tax cut to 21% from 35%. Banks would reap a windfall because they tend to take fewer deductions. The shares of big banks sharply rose Friday.

Banks are happy about the prospect of a businessman in the White House who’s intent on deregulating financial services. High on the list: eliminating the Dodd-Frank act. Advocates of Dodd-Frank say it would prevent another 2008 crash. Banks say it ties their hands.

Aerospace stocks also outperformed Friday. Aerospace is more than an industry, science, or even miracle. It’s a strategic asset. A nation’s standing in aerospace helps determine its competitiveness.

America dominates aerospace/defense. The U.S. defense budget represents 40% of total worldwide spending. The defense industry often moves in tandem with technology. They’re intertwined. Trump’s defense spree is a tailwind for both sectors. This momentum should continue in 2018.

Many analysts call for a correction next year. The correction hasn’t happened as expected in 2017, but that only delays the inevitable. Defense firms should weather the storm.

Overseas risks strengthen the Pentagon’s case. When North Korea rattles its saber, defense stocks jump. No matter who controls Washington, the military gets it way. The rest of Trump’s agenda is immaterial. The chart tells the story:

Tax bill holdouts…

Polls show that the tax bill is unpopular. The GOP plan guts deductions for the middle class. But corporate rates get slashed. And that gets Wall Street’s juices flowing.

The tax bill is moving the market, but only over the short term. Even without tax cuts, investors are confident over the long term. Rightfully so. Economic data have been robust. Earnings growth and an expanding economy also drove Friday’s rally. Predictions are positive for 2018.

Stock markets have rallied in 2017, partly because President Trump promised to cut taxes. Which is why on Thursday, stocks took a dive. Two Republican senators, Marco Rubio of Florida and Mike Lee of Utah, declined to back the bill. They sought changes to child tax credits.

Other GOP senators say they were betrayed by broken promises to protect Obamacare. Susan Collins of Maine has been the most vocal.

The leadership on Friday appeased these holdouts and they’re returning to the fold. GOP leaders hope to line up the bill for a vote next week. The balance of power in the GOP-led Senate is 51-49. The vote will go down to the wire.

One big concern is how the tax bill would bust the national deficit. Nonpartisan analysts say the bill would boost the deficit by $1.4 trillion. Some Democrats argue that the bill is designed as an excuse to cut social programs. Their opposition is fierce; no Democrat supports the bill.

How will the tally finally come in? It’s been a wild year. No one can say. But this much is clear: the Dow on Friday racked up a record four weeks of gains in a row. All three indices closed in the green. Let’s do the numbers.

Friday Market Wrap

  • DJIA: +0.58% or +143.08 points to close at 24,651.74
  • S&P 500: +0.90% or +23.80 points to close at 2,675.81
  • Nasdaq: +1.17% or +80.06 points to close at 6,936.58

Friday’s Big Gainers

REIT spins off malls.

Improved guidance lifts sportswear firm.

Defense firm boasts strong product pipeline.

Friday’s Big Decliners

Executive misconduct continues to roil realtor.

Wearable device firm gets downgraded.

Tech firm issues weak estimates for cloud growth.

Letters to the Editor

“Which end-of-year trends should I watch?” — David E.

First, there’s the end of December. To claim capital losses, many investors during the final trading days of the year dump stocks that have declined in value throughout the year. Investors engage in tax-loss harvesting to offset realized capital gains. The result: a sell-off.

Then there’s the January effect. At the beginning of January, investors return to equity markets with ferocity, pushing up prices of mostly small cap and value stocks.

The two trends are linked. The January rally is driven by an increase in buying, which follows the drop in prices that typically happens in December.

Got questions about trends that occur this time of year? Drop me a line: mailbag@investingdaily.com

John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.

 


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