The DOW Jones Industrial Average started with a dozen listed stocks back in 1896, and now lists 30 American conglomerates with only one original company, General Electric, still participating. The addition of Apple to the DJIA in 2015 shows that it is no longer a listing of just “industrial” companies. The DOW took 77 years to achieve the first 1,000-point mark, and in 2017 alone it’s achieved that five times over, ending the year near 25,000.
It took only one month for the DJIA to go from 24,000 to 25,000, and if we thought that was fast, how about the mid-January rally with an uptick of 25,000 to 26,000 in only seven days! Setting new records out of the gates in 2018, following a stellar year in 2017, investors are wondering – is there any slowdown in sight?
Political Impact on Economic Growth
Since the election of President Donald Trump, the DOW has spiked 7,000 points, or about 40%, along with the Nasdaq climbing 38% since the election. The S&P is experiencing the longest period of low volatility in history reaching four times it’s bear market low and has not experienced a 5% pullback since June of 2016. Since the election in November of 2016, the S&P has not declined even 3% either in a single day or over several days.
Since the election Amazon (AMZN) has increased 65%, Netflix (NFLX) is up 80%, and Nvidia (NVDA), a tech company based in CA, soared 213%. It’s not only tech companies, Bank of America (BAC) is up 85% and Best Buy (BBY) has seen an increase of 90%.
Corporate Tax Rates Catalyst for Surge
Put in place a 40% cut on corporate taxes and watch what happens to the stock market. The reduced corporate tax rate is a catalyst to the surging market, setting the stock market soaring with unprecedented growth.
We are experiencing the longest period of calm in history, even greater than the mid-90’s. This reflects the tremendous excitement on Wall Street, some calling it downright euphoria. We are witnessing record corporate profits with strong growth in the U.S. and abroad, which will be boosted even further by the GOP tax overhaul, specifically the reduced corporate tax rate.
Corporate America is letting us know how they feel about tax cuts.
Tax Reform Winners: Corporate America – and Wall Street
Trump campaigned his tax reform as a change that will be good for middle-income Americans.
Just how much Main Street USA benefits from tax reform remains to be seen, but there is no question that the big winner of tax reform is Corporate America – and Wall Street.
The Tax Cuts and Jobs Act recently passed by President Trump, before the Christmas Holiday as promised, took the current corporate tax rate of 35% down to 21% permanently, with no expiration on the horizon. The new tax reform also gives a 20% tax deduction to pass-through organizations like Partnerships, S-Corps and LLCs.
This significant reduction to corporate income tax was the focal point of President Trump’s tax reform plan from the beginning of his campaign. These new corporate income tax rates move U.S. businesses closer to Canada’s income tax of 15% or Ireland’s income tax rate of only 12.5%. Mexico’s corporate income tax rate was 30% in 2016. For the first time in a long time, corporate income tax is lower in the U.S. than in Mexico.
Repatriation of Income from American Companies Operating Overseas
American companies operating abroad will see significant savings as they will no longer owe corporate taxes on income earned overseas, which may encourage corporations to keep their income in foreign lands. When corporate income is repatriated into the United States, however, that income will be taxed at a rate between 8% to 15.5%, a far cry from the current 35% tax assessed to repatriated funds, giving incentive like never before to bring those profits back into the country to spur further domestic growth.
In fact, Apple just issued a press release in January announcing plans to bring home massive offshore cash hoards which will generate repatriation tax payments nearing $38 billion, the largest in history. Apple, the world’s most valuable company, also announced plans for U.S. investment and capital spending.
Individual Tax Reform
Individual tax rates will decrease as well, on a much smaller scale, with tax cuts eroding each year until 2027 when they expire. When this happens, some individuals will face a 53% tax increase, if something is not changed before then. While the individual tax reform is beneficial to the pocketbooks of most individuals, this is only true on a short-term basis.
Perhaps the idea is that middle class Americans will be so much better off with more jobs, and higher paying jobs, that the scaling increases won’t matter. I guess we’ll cross that bridge when we come to it, as Scarlett O’Hara would say, “tomorrow is another day”.
Some fear that corporations will lavish their highly compensated employees with dividends and stock, rather than invest their newly found money into workers and higher wages. In fact, there has already been a surge in corporate stock buyback announcements since the passing of the Tax Cuts and Jobs Act.
Time will tell, but one thing is clear – corporate America with their sudden increased profit margins is fueling the Bull market with unprecedented growth.
To Infinity and Beyond
Just as we stated in our article How Long Can the Market Sustain its Low Volatility, there are other factors contributing to the calm on Wall St. One important consideration is that there are fewer players in the market than years ago. From 1998 to 2015, the number of publicly listed stocks declined to about half going from 7562 to 3812.
Fewer stocks to trade with less players in the game, and the ever-increasing rise in High Frequency Trading (HFT) all contribute to reduce the range of opinions in the stock market, fueling the low volatility. We still cannot answer the question, however, as five months after that post, the VIX is still docile and just closed at it’s 2nd lowest rate ever.
While the overall fear factor is still quite low, this unrelenting surge has market watchers feeling a sense of uneasiness rather than pure excitement. Some fear the market is in a ‘melt-up’, which is unsustainable, as the surge is based on emotion rather than fundamentals. And as we all know, a melt-up is always followed by a melt-down.
Rapid price increases based on emotion fuel the FOMO syndrome, (Fear Of Missing Out), rather than trading on traditional fundamental policies, although it appears that FOMO is pervasive in the market today.
Even some Bulls are questioning if it’s soaring too far too fast. The recent rally is nothing but impressive, but if history has taught us anything it’s that this is the type of rally we typically see at the end of Bull market. We would be foolish to assume that the rally will continue throughout 2018 as it did during 2017. Some experts feel that a correction is long overdue. This rally is quite unique in that most bull markets will pause for a breather once in a while, as market declines are healthy and normal, even in the most historic of rallies.
The stock market today appears to be more like a stock car on nitro. The race is on at Wall Street and while we’re along for the ride, we still wonder when we’ll make a pit stop to refuel, or if we’ll crash and burn.
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