Stocks up, taxes in the news, French elections upcoming
- Stocks higher in last full week of February
- Trump’s economic growth plan in the news
- Important French election approaching
Stocks continued moving higher this week, the 5th consecutive week the S&P 500 increased and the 4th in the last five for the Dow. For the week, the Dow increased 1.0% while the S&P 500 increased 0.7%.
Incoming Treasury Secretary Steven Mnuchin talked about the administration’s economic growth plan in an interview with CNBC earlier this week. While specifics weren’t released, the framework included significant tax cuts for individuals and businesses and a reduction in business regulations. Mnuchin said the tax cuts were targeted for middle class earners and that any reduction in marginal rates for higher income people would be neutralized with declining deductions. I think lower rates with fewer deductions is a more efficient way to raise revenue. I also think it reduces economic distortions as people focus on business and investing instead of maximizing tax deductions. There was less information on corporate taxes in the interview, although the Border Adjustment Tax is still being discussed. The discussion lacked specifics on regulations as well, but he said the goal was reduce the regulatory burden on small and medium-sized businesses. Regulations often hit those firms the hardest because they lack the money or scale to effectively comply with myriad regulations. Mnuchin said they plann to have specific proposals and details released over the summer. As with all legislation, the details will be critical. Read More
French Presidential elections will become a bigger news/market topic over the next two months. The key reason markets are watching is what is means for the future of the EU and Euro currency. Marine Le Pen is leading in many polls and she has suggested France should abandon the common currency. Even though she appears to be leading in some polls, it would still take a pretty big upset for her to actually win the Presidency. French elections are structured very differently from ours. It’s a two stage process where the first round contains every candidate running and the top two vote recipients advance to the final round two weeks later. A candidate can win outright in the first election by receiving over 50% of the vote, but that has never happened and doesn’t appear likely to happen this year. While Le Pen polls well as peoples’ first choice candidate, she doesn’t appear as many peoples’ second choice. This suggest she is likely to advance to the final election, but most likely lose to the other runner-up as that candidate consolidates more of the votes from the eliminated candidates. That said, people are watching closely after the upset votes for Brexit and Trump as populist philosophy continues to take a greater hold in the West. Read More
I’m still thinking through what a potential Frexit would mean. This would be very different from Britain leaving because Britain has its own currency. Britain leaving the EU would/will cause some renegotiation of trade deals and work/travels rules, etc, but the country’s debt remains in the same currency and its central bank remains intact. Debt throughout the economy also remains in the same currency. If France leaves and returns to the Franc, billions in government and private debt could be at risk. It’s unclear how France would attempt to handle Euro-denominated debt in a transition and whether it would lead to a default. The biggest issue could be France losing access to funding from the European Central Bank and having to re-establish its own central bank. There’s numerous variables at play and if Le Pen’s popularity keeps rising, expect to read/hear a lot more about the potential ramifications.
Oil was up this week, increasing 1.2% to close at $54.02/barrel. The yield on the 10-yr Treasury decreased sharply, closing at 2.32%, from 2.42% a week ago. The average rate on a 30-yr mortgage ticked slightly higher to 4.16% from 4.15% last week.
|10-yr Treasury (∆ in bps)||2.32||(11)||(13)|