The Dow 30 Industrial Average is currently trading at 20,515, down from its absolute closing high of 21,115 posted March 1st 2017. After the impressive rally in equity prices post-election, it appears as this newsletter has said in recent months that the markets are looking for the realities of Mr. Trumps promises and not just his words. Corporate tax reform is about to take center stage and the equity markets have certainly rallied since November in hopes of a reduction in corporate tax levels.
Here is a little lesson in corporate tax: The U.S. has had a top statutory corporate tax rate of 35% since 1993, the highest current level among developed economies according to the Organization for Economic Co-operation and Development (OECD) data. Any company that actually pays 35% should hire a new team of accountants. The average effective rate is 24%, consistent with other developed economies. For Fortune 500 firms, that number comes down closer to 21%, suggesting tax reform would be more beneficial to small and mid-cap firms. The headline number that will get the most attention when it comes to expectations will be the new top marginal corporate tax rate. We’re at 35% now. The number Republicans have been eyeing is 20%, although President Trump’s initial proposal was 15%. 20%, according to LPL Research is a politically attractive target, a nice round number meaningfully lower than 35%. In fact, at 20%, you can practically say that you cut the rate in half. On the other hand, 30% would feel like relatively little progress. So, expectations have settled around 25%. From a Republican perspective, anything higher than 25% would probably be considered at least a modest disappointment; anything below 25% a modest success. Also not known is when the change in corporate tax legislation may occur but know that the equity markets have priced a change in the corporate tax levels into the markets and I thought a higher level of understanding of this subject in some detail would benefit you.
Clients are always asking me what will the market do in the short term? I have to answer truthfully and say, “nobody knows”, but that doesn’t deter researchers from trying to determine short term movements. Today is a mixed bag of data and LPL Research thinks there is a possibility of equity market weakness because on April 12, the S&P 500 closed below its 50 day moving average for the 1st time in 130 days. This could be a sign and if there is weakness, we will look carefully to a point in the future and see if that weakness might be a buying opportunity. Eight major global indexes are in uptrends: S&P 500, Nasdaq Composite, NYSE Composite, Dow Jones Industrial and Transportation Averages, Russell 2000, MSCI Emerging Markets and the MSCI EAFE. This global strength is impressive and should the ride get bumpy, we will consider options if some investment doors open. – Mark
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Economic forecasts may not develop as predicted. Some of this research material has been prepared by LPL Financial. All indices are unmanaged and may not be invested into directly. Referenced material: LPL Research Weekly Economic Commentary & LPL Research Weekly Market Commentary, both dated April 17, 2017. Approved Tracking #: 1-600772.