I’ve been following the Republican effort to reform the tax code being led by President Trump. As this plan has coagulated through the negotiation process it's morphed quite a bit from my original expectations. At this point, much of my hopes for true reform have diminished and I’ve become more focused on something else. The simple idea of it.
It's no secret stock prices have been on an absolute tear since the election in November 2016. My opinion on the initial rally was that it more to do with the Obama administration going away than with anything said or done by Donald Trump or Hillary Clinton. The Obama administration's approach toward regulation was, in my opinion, opaque and burdensome and left much of American business feeling tormented. I know I’ll get some emails on this next statement, but I believe the initial rally following the election would have occurred even if Hillary had won.
This rally, however, has proven to be much more than a simple post-election bounce. As an investor, I believe the primary driving forces behind it are a strengthening economy, exceptional corporate profits and the end of super-low interest rates, which I feel work to confuse markets. It can’t be denied however that the hope for a reforming regulatory climate and the hope for some level tax reform have served as nice tailwinds to the stock market.
From being in the heavily regulated financial field, and from talking to friends and clients working in other industries, I do feel like some of the anxiety related to the regulatory climate has diminished this year, so this tailwind feels like it is being validated, but I have also become quietly concerned the other part of the tailwind, the tax reform part, would disappoint.
And if the markets were being at least partially propelled by the idea of tax reform, what would that mean for our current uptrend in stocks.
Enter the Republican tax plan. My first impressions are this thing is a mess. Far from the “taxes on a postcard” claim that’s being made, this plan uses the same ole tax code social engineering tricks, only now the tricks are targeted toward Republican perceived constituencies, versus previous tricks targeted toward Democrat perceived constituencies. There is no individual tax “reform” in this plan, and I honestly can’t figure out whether individual taxes for my clients and my family are going to go up or down. So much for the postcard.
Fortunately, however, I don’t think the stock market rally was ever being driven by the idea of individual tax reform. From the perspective of the “idea” of tax reform working as a tailwind to stocks, this plan does maintain two items which I feel just might validate the expectations of investors: the 20 percent corporate rate and the corporate asset repatriation plan.
So what do these items mean to most of the readers of this column? In a direct fashion, nada, very little. But these items mean a lot to improving the competitiveness of American business, and that means a lot to investors over the long term, and so on this level, the “idea” of this tax plan might just be enough to validate and help sustain the current uptrend in stocks a bit longer. It'll be important to watch these items closely as the Washington sausage making continues.
Opinions are solely the writer's. Marc Ruiz is a wealth adviser with Oak Partners and a registered representative of Sll investments, member FINRA/SIPC. Oak Partners and Sll are separate companies. Contact Marc at marc.ruiz@oakpartners.com.
