Stocks rose last week. Soaring Friday, as odds improved for tax reform’s pre-Christmas delivery. Telecoms led the way, on the wings of the FCC’s decision to drop the Net Neutrality rules.
In a 3-2 vote, the FCC approved the Restoring Internet Freedom Order. The order reverses a decision made by the Obama administration to regulate internet service providers (ISPs) under the Telecommunications Act of 1934 — a law intended to establish rules for phone and local electric companies enacted decades before development of the internet.
While the internet operated effectively and efficiently before net neutrality, the FCC in 2015 inexplicably determined that a radical transformation was required to “save” it. Last week’s FCC’s decision frees ISPs from burdensome and oft-politicized government control. We believe the consequences will be positive. Because beyond all the talking points about government ensuring our freedoms to protect us from each other, history reveals that a citizenry requires certain measures of independence from its government. Perhaps, that is the philosophical underpinning that — unlike those systems that came before it — might ultimately permit capitalist democracy a permanent place within global society. Especially as it alone, among other political systems, has been willing to cede control of some societal aspects. Yesterday, it was the Internet. Today, it’s Bitcoin. Who knows what tomorrow will bring?
More broadly, the Animal Spirits have been unleashed. The latest report from Bank of America shows U.S. equity inflows totaled nearly $8 billion last week. The largest jump in 26 weeks. Large-caps enjoyed their largest inflows in 33 weeks. While value stocks enjoyed their largest in 36 weeks.
And more upside awaits. With UBS estimating that only 40 percent of the tax cut has been priced into stocks. And expectations for a surge in M&A and buybacks likely to follow the legislation’s passage. Analysts from Credit Suisse and JPMorgan underscored this sentiment. Emphatically echoing our thesis: that deregulation and tax reform could be a massive boon to the U.S. economy.
Continuing, the NFIB survey of small businesses showed the second-highest level of optimism in the index’s 44-year history. Hitting its highest level in 34 years. And with Bitcoin careening towards $20,000, one senses the raw enthusiasm emanating across the landscape.
Bitcoin has traversed an interstellar path this year. Though its proper place in the global marketplace remains a source of confusion. The blockchain technology on which it’s based represents one of the biggest technological breakthroughs since the turn of the century. Bitcoin’s future, on the other hand, remains both promising and opaque. We will have much more to say on this fascinating topic in 2018.
A glance at the culture wars reveals a divided America. Even in the means by which we reference the holidays. According to a new survey by Monmouth University, 87 percent of Republicans use “Merry Christmas” as their “preferred seasonal greeting,” while only 58 percent of Democrats do. Conversely, one in three Democrats prefer to use the more secular — and politically correct — “Happy Holidays” greeting, compared to just 9 percent of Republicans.
For what it’s worth, 48 percent of respondents admitted to having a favorite animated holiday television special. Among them, 32 percent said it was “Rudolph the Red-Nosed Reindeer,” beating out shows featuring Charlie Brown (24 percent) and the Grinch (14 percent).
While we enjoy The Simpson’s “Grift of the Magi,” we certainly recognize the raw charisma of the indomitable Misers, Heat and Cold.
Elsewhere, the media continues to focus on issues that do not merit the incessant scrutiny being received. Leaving Americans feeling morose at a time when the economic data says we should be optimistic.
Consider the renowned psychologist and Nobel Prize winner Daniel Kahneman, who was once asked to specify the scientific concept that, if appreciated properly, would most improve everyone’s understanding of the world.
Kahneman chose a subject he termed, “the focusing illusion.” And went on to summarize that human tendency in the title of the essay he wrote: “Nothing in life is as important as you think it is while you are thinking about it.”
This is important. Because GDP growth has percolated above historical norms, serving as a “rising tide to lift all boats.” But the media, in its critical role as society’s agenda-setting mechanism, continues to serve a steady dish of pessimism topped with cynicism. Even as household jobs, income and wealth data improve.
While public and private debt levels remain worrisome, the rising economic tide could allay those fears. And contrary to the histrionics against it, tax reform is a reality. Which will also provide an economic boost.
The new reform law will provide tax relief for nearly all income groups in 2018, and more so in 2019. With the lower-middle-class households receiving the largest tax reductions on a percentage basis but upper-income households receiving the most money.
According to the Joint Committee on Taxation, taxpayers would receive an eight percent tax cut in 2019, marking the high-water mark for a measure whose benefits phase out over time. A 13.5 percent cut would go to households making $20,000 to $30,000 each year, putting almost $3 billion more into their pockets.
Households making $100,000 to $200,000 a year would receive a 7.5 percent cut. Equating to more than $70 billion. Their average tax rate would drop to 19.4 percent from 20.9 percent.
Moreover, taxpayers will have the ability to drop government-subsidized insurance following the elimination of a mandate requiring most Americans to buy health insurance or pay a penalty. Placing the freedom to prioritize the cost and value of health insurance back into the hands of American consumers.
The corporate tax rate will drop from the world’s highest at 35 percent down to 21 percent. And companies will have the opportunity to repatriate the oceans of cash sitting overseas by paying a one-time tax rate of roughly 15 percent. Importantly, pass-through entities (LLCs and S-Corps) which account for most of the nation’s small business will see their tax rates drop precipitously.
Despite the caterwauling over the tax breaks granted to corporations, those too will benefit mainstream America. As some companies decide to increase hiring and capital expenditures like additional resources, plants and facilities.
Of course, some companies will use the tax windfall to repurchase their own stock. But that will not be entirely self-serving. Gallup News reports that 54 percent of U.S. adults are invested in the market, which includes both normal and tax-preferred retirement accounts.
While it’s true that a greater percentage of those making more than $75,000 a year are investing, Gallup says 54 percent of middle-income workers earning between $30,000 and $75,000 are also investing. Providing much of the middle and upper-middle class, as well as the wealthy, with an economic boost.
The insouciance to such facts portrays the desire of some to simply continue ad-hominem attacks against the nations maligned upper class, as opposed to recognizing good policy that serves most of the electorate. Especially considering that D.C. produces so little positive, broad-based policy these days.
Have we become so politically cynical?
Regardless of how you feel about the corporate tax windfall from a public policy perspective, the reality for investors is that buybacks have powered the bull market since 2009. If companies can do even more of it next year? Then we might expect another double-digit positive year for stocks in 2018, all things being equal.
We’re not naive enough to believe the tax-reform bill is perfect. It’s not. As a concession to the anti-tax reform crusaders, the bill dictates that some of the tax breaks will phase out around 2025 — unless extended by future administrations. Nor does the bill do much about the excruciating alternative-minimum tax, which will continue to jack up tax expenditures throughout the country. And we believe the nation would have been well served by a bigger reduction in the number of tax brackets hitting American taxpayers at all levels.
In the end, however, we revel in the fact that the last time the tax code incurred major reform was 1986. 32 years ago. Ronald Reagan was president. Eddie Murphy had just released his hit song, “Party All the Time.” Top Gun and Crocodile Dundee were the two highest-grossing films. And the tax code was less than 30,000 pages. Today, it has swollen to over 70,000 pages.
Even some of Trump’s biggest critics are concurring. Today The Washington Post declared that the new tax reform package will benefit eight of ten American households by enabling them to keep more of the money they make. And The Brooking Institute stated that 80.4 percent of Americans will receive a tax cut. With the average cut being $2,140. Only 4.8 percent will see a tax increase.
In the final verdict, it certainly looks like a good thing.
We revile both self-serving political parties on an equal-opportunity basis. But we’re compelled to note that the idea that no Democrats signed on to this bill demonstrates how far they have strayed from their core constituents. The party was way off the mark on this score. And may pay for it dearly next November.
GDP growing at three percent? Unemployment at record lows? Soaring business and consumer confidence? Stocks at all-time highs? Deregulation freeing up American companies to innovate and grow? And now tax reform? All of it just in time to wrap up and lay ‘neath the pine-covered boughs of the Christmas tree.
So raise a mug of eggnog — however you might take it — and propose a toast. First, to this greatest of all nations. And our sheer luck for living here today. Next, to our families, our health, our freedoms and our prosperity.
Major indices finished higher last week. The DJIA gained 1.33%. The S&P 500 rose 0.92%. The Nasdaq climbed 1.41%. While small cap stocks gained 0.57%. 10-year Treasury bond yields fell 2.5 basis points to 2.35%. And gold closed at $1,255.45, up $6.95 per ounce, or 0.56%.